> But Legoland Korea struggled out of the gate, too far from Seoul and too expensive for what was on offer, and it did not generate enough revenue to honor the bonds. Also, as South Korea’s real estate market softened, the value of the real estate backing the bonds began falling below the amount of the debt.
This is the heart of the problem.
I know the current South Korean president owes his victory in part to popular resentment in the face of the Moon administration's inability to stem the explosive growth of housing costs in Seoul.
Could it be that the target demographic for this Legoland just doesn't have enough disposable income or free time to make the asset profitable? It sure seems like it. Other Legolands around the world don't struggle with profitability. Distance isn't an issue for car owners. But cars are more expensive than ever. And shelter costs in SK are too high in proportion to household incomes.
Housing speculators and NIMBYs are going to kill capitalism.
I'm not sure how you see that a small piece of bad debt is the heart of the problem versus a government repudiating a loan guarantee during increasingly severe global contraction thus destroying the market for more risky (e.g. corporate) debt.
> Governments issue bonds for what turn out to be bad investments all the time.
Yeah, and this is even worse since Gangwon-do is an extremely rural and aging area without any hope of future growth. It only contributes 2% of the total GDP in South Korea and is rapidly shrinking. No sane private entity would go there without government supports since none of significant development there would make financial feasibility. It's where a government is supposed to intervene.
The current governor (who was a prosecutor like Yoon anyway) seems to consider this as a really good chance to put their political opponents into jail and they need to access confidential information to make the case. The default is a necessary part for the grand scheme and he probably was willing to make that sacrifice. He was just not competent enough to understand its implication.
I do think Legoland should never have been built there (they found one of the largest bronze age settlements ever found in Korea - they built freaking Legoland on top of it anyway), but it was built, and defaulting on bonds was probably the stupidest thing anyone could have done with it. I mean, someone could've sneaked in with a can of gasoline at night and burnt the whole thing down, and it would have cost less on the Korean economy.
So you are telling me they could have built lower cost tourist attractions based on the bronze age history of the location but they decided to pave over their money maker because Legoland is an internationally recognized brand?
Well, in terms of money-making, the bronze age settlement would have made, at best, a small provincial museum that attracted a negligible number of people. Nobody drives an hour to see some stones arranged in the shape of a house.
Builders bulldozing over irreplaceable ancient sites are not exactly unique to Korea, after all. (At least this one got excavated.)
> Housing speculators and NIMBYs are going to kill capitalism.
No arguments with the sentiment, but keep in mind that South Korea is roughly the size of Indiana (the 12th-smallest state) and over two-thirds of what land they have is mountainous, populated by over 50 million people. It's hard not to have relatively expensive housing in that country, just based on the sheer lack of availability of land.
Of course, it doesn't help that half the country lives in the Seoul Capital Area.
This was a fascinating read. Is there any sort of explanation or analysis out there on why so many political leaders as of late believe they can alter the deal and then keep the same level of trust immediately afterwards?
I know this happens occasionally and I may just be seeing a pattern that’s not there, but it seems like a noticeable uptick in leaders who don’t understand why people they just fucked over won’t trust their IOUs anymore
It's unlikely that this politician explicitly believes in MMT, but the belief that you can somehow wish debt away in in-line with MMT. And of course, any philosophy exists within the zeitgeist of the times. After the GFC, a lot of people in the world started to believe that money is somehow imaginary.
> the belief that you can somehow wish debt away in in-line with MMT
The belief that you can wish debt away is rooted in the Keynesianism/Reaganomics of the past five decades. MMT basically just accepts the realpolitik that the enormous handouts to the financial industry will never be stopped, and says that we might as well use some of the new money deliberately. From my economically conservative Austrian perspective, at least MMT appears intellectually honest. MMT also corrects/shortens the feedback path from monetary creation to price inflation, rather than relying on the roundabout feedback path that has created this ever-growing asset bubble.
It would be more appropriate to say that Keynesians understand the system well enough to say that it is impossible to get rid of debt without negative interest rates so the only way out is to have slow burning inflation and the most effective way to generate inflation is not via the central bank but by government spending.
I advocate replacing slow burning inflation with negative interest on cash. When that is done, debts can be repaid.
I think you'd be surprised the degree to which many far right politicians would be supportive of some versions of MMT.
MMT is attractive to essentially all politicians. It says you can spend without consequences. You don't have to spend that on a welfare state although many MMT advocates take this line. You could just as easy spend it on the military or surveillance.
Really? I thought it said that money exists because a government prints it, so a government cannot default on a debt denominated in its currency unless it chooses to, and that inflation is a second order effect resulting from the money supply increasing faster than the pool of goods and services it's chasing.
What you tend to see is some MMT proponents use this argument to state that government deficits aren't a problem, since they can't default on their debt. But the debt can still be a problem, not because a government indebted in its own currency can't default, but because it still has second order effects...
But we have seen that countries who did more QE had even less inflation like Japan. The reason for that is that interest rates hit zero and therefore debt does not grow from interest which means less inflation is needed to erode debts.
The second order effects that limit money creation are highly fluid but the fact that governments with their own currency cannot default is set in stone.
I think that was always the main argument against MMT prescription "spend like there is no tomorrow if the inflation is low". Politicians and population love only this part and will ignore/fight the other one.
Far right doesn't mean reagan ist anymore. MMT is quite popular among populists, probably because they hate the elite and MMT is pretty explicitly about elite economists being wrong.
Doesn't MMT actually prescribe the exact opposite? One central "layman's" understanding I have about MMT (and honestly happy to be corrected if I'm wrong) is that, for countries that control their own currency, you don't really have to care much about deficits and debt in low inflation environments. You only have to worry about them in as much as they relate to inflation.
Well, inflation is currently sky-fucking high, so right now is when MMT would say you do have to worry about deficits and debt.
Inflation wasn’t terrible in Korea and has likely already passed its peak. The decision to default on the bonds was clearly about servicing the debt and the impact of debt payments on the government’s ability to create a budget.
Yeah, having a quick read of the article, nothing in this has anything to do with MMT, apart from the fact that MMT is a theoretical framework of how economies work (including in the models both a banking system, and the interactions between Government, domestic and international sectors, that all actually follows accounting rules) that can help understand why what happened was bad...
Our politicians are bribed, bullied and intimated to enrich a few at the expensive of us all.
Every single election is completely corrupt, do you really think all those billions that they pay to ALL parties are for nothing in return.
And if you don't toe the line you will be punished.
When you realise that this is the case all the insanity makes sense. Where BLM supporters will gladly provide awards for individuals with actual swastikas on their skin. Where states will move to completely deindustrialisation without consultation of the citizens. Where countries won't grow their own food. Where they buy the debt of the those that are oppressing them.
It's all madness until you realise we are all without sovereignty.
Huh? Colonial looting is often disguised as the natives voluntarily overpaying for a frivolous luxury, so this doesn't seem like a great counterargument.
Anyone confident in any answer here is too confident to listen to. But I generally think of it as a natural result of big change.
Big economic/political/tech shifts leave people mistrusting old institutions that naturally aren’t well equipped to handle the new situation. The institutions screw up, electors lose trust, and new folks take over. The new folks (being new, and sometimes being the less-competent rejects) tend to misunderstand the institution, and change things that aren’t necessary; they overreact.
What you’re seeing is just the overreactions: they’re knocking out walls, and sometimes they hit the wrong wall.
But you also don’t see the benefits because effective bureaucratic adaptation is boring.
The thing I wonder about is if the seeming endless screw ups are because we have more change today, more morons, or we just see it all more.
I agree mostly but would amend one thing: I think there is a mix of well-meaning overreaction and often substantial hubris. Politicians tend to have big egos, and many, especially of the upstart class, seem to mistake popular appeal for efficacy ("people seem to really like this platform--I must be on to something here"). So in these cases they'll ignore their lack of understanding of finance and do random or inadvisable things in the hope that the outcome will be good--and if so they'll be heroes. I don't think they realize that awful outcomes are actually quite possible when pulling big levers in complex systems you don't understand, and that awful outcomes had previously been avoided because, in recent memory, policy decisions tended to be made with a measure of respect, at least, for the things that might absolutely, causally wreck the economy.
At the opposite end of the global scale, I've often seen new (young) employees, arrive and immediately start suggesting sweeping changes.
We're using the wrong language, the wrong source control, the wrong methodologies, the wrong libraries, and so on.
If the flavor of the month is say BoringSSL we should be working to switch all our code from OpenSSL and so on.
Usualy it takes a bit of effort to bring them up to speed. There are positives and negatives to all choices. Usually I assign them the task of coming up with 5 downsides to their suggestions.
Articulating the downsides helps to show you understand the whole impact of an idea, and thus aren't making a "buying the koolaid" decision simply based on popular opinion.
Not new. Lot of examples from history under the Theory of Bounded Rationality. Theory says there is an upper limit to the complexity any group of chimps can handle.
There is a "populist renegade leader" persona, that violates rules, social customs, and even laws, to signal their independence. The populist appeal is that the rules are seen as being meaningful only to the elite, or too technical to be believable.
This is my personal theory: modern technology and media has made it more possible to surround yourself with only like-minded views that share your "fairy tale thinking", even if the eventual outcomes are obvious from the outset.
Was really glad that this article mentioned Liz Truss at the end, because I think the dynamics are absolutely the same. It was painfully obvious (indeed, the current PM made it clear in the summer) that cutting taxes, and having no way to pay for them, in the midst of rampant inflation is an idiotic idea. I read elsewhere that it's almost as if Truss and Kwarteng formed a pact in college saying, "if we ever make it to the top of government, we'll prove that supply side ideology works!", and then completely disregarded the current economic climate.
I just see it more and more over the past decade or so that things that you know are not going to end well (see also crypto deposits paying 10% interest) somehow snowball because it's easier to surround yourself with "ideological cultism".
The most recent US federal legislation (the Inflation Reduction Act) actually raises government revenue significantly. While the Inflation Reduction Act probably won't do much short term with respect to inflation, it should reduce the deficit over the long term.
I can definitely understand arguments and debates around the proper level of taxation. But while it may be acceptable and even a good idea to substantially lower taxes and raise the deficit during periods of low inflation, it is the height of idiocy to do that during a period of high inflation.
Debt reduction of ~$6B/year is rather minimal given trillion dollar annual deficits.
“CBO estimates that Public Law 117-169 will result in a net decrease in the unified deficit totaling $58.1 billion over the 2022-2031 period. That decrease in the deficit is estimated to result from an increase in direct spending of $50.6 billion and an increase in revenues of $108.7 billion.”
This is an example of fairy tail thinking though because so many people say this. Government spending money that didn’t directly come from taxes during inflation is just going to pour fuel on the inflation fire, regardless of how useful the investment.
Money needs to be taken out of circulation, not added.
The irony is that the damage is almost exclusively done by Conservative governments who are traditionally view as more fiscally responsible and more competent at economics, while the left side of politics are often viewed as more ideologically driven.
A similar reversal of roles can be seen in Germany, where the greens economics minister surprised the business community with effective solution oriented "realpolitik" and the free Liberal (a pro business/free market party) finance minister is blocking decisions for purely ideological reasons often against the recommendations of large portions of the business community.
Rick Perlstein goes into some depth on this in direct response to Liz Truss. And yet, after her brief reign, I wonder if he misunderstands why he's her favorite author. Perhaps she didn't misunderstand any of it, she merely said the quiet part loud.
More likely that 'modern tech' is just exposing corruption that has always been there.
This is just statist feudalism exposed.
Modern technology is also amplifying populism, which is who the word 'Truss' ends up in all of this, because however much one may agree or disagree with the contents or orientation of the mini-budget, it was woefully misrepresented in the press (almost universally) in an excessively populist manner.
Investors actually seem to have short memories. They are more interested in whether they can make a quick profit. An example is Argentina, which was issuing 100 year bonds in 2017 at an interest rate of 8%, despite a long history of defaults and inflation.
After 9 years, you'll get your money back, but without any return. If they last 11 or 12 years, and since it's paid in US dollars, you'd get a little return on the investment. The question is whether they'll continue paying out for 12 years.
But my point is more that investors haven't blacklisted them forever, just because of prior defaults.
I don't know whether the interest on this particular bond is still being paid at the quoted rate, or if it was "restructured", since they did default again in 2020:
I think the key is that most politicians (and honestly, just about everyone still of working age) haven't been in an economic environment like this one- not since the early 1980's four decades ago. Everyone today grew up in a low-to-zero interest rate environment with low inflation. Argentina- the international borrower most famous for defaulting- has, over the past 21 years alone, defaulted 4 times (2020, 2014, 2005, and 2001)- a total of 9 times since they got independence in 1816. And yet, after the 2014 and 2020 defaults they were issuing debt on the global market at reasonable, normal, non-penalty rates within a short period of time. That was because the overall bond market was so low that investors were desperate for yield, hence Argentina's bond issuance got over-subscribed and so they didn't have to pay much of a penalty.
If the current high-inflation, high interest rate environment sticks around, a whole lot of things are going to end up very different, because the bond investors won't be so desperate for yield and so there will be a penalty for disrespecting the bond market. If it doesn't stick around (which seems to be the current aggregated guess of the bond market) then this will be a brief blip. Trillions of dollars rest on the answer to that question.
Everything you are saying here is orthogonal to the developments described in the story. A provincial government refused to honour bonds in a tiny development in their region and it caused a contagion across the country.. none of this has anything to do with the current rate of interest or the orderly federal default of Argentina and its re-issuance of bonds at generous rates.
For two decades defaulting on your bonds was not be a big deal- witness Argentina. So a rando local politician thought it wouldn't be a big deal, because that's been most of his political career. And the way the bond market is now, it is not nearly as forgiving, so it became an enormous deal.
It is not a big deal if Argentina defaults on its bonds because they were already paying a huge premium because everyone expects them to default on their bonds, South Korean governments municipal to federal do not pay that premium because they are considered reliable - if there are doubts no one knows how to price their bonds - so they don't get bought. It has nothing to do with now vs then!
If you want an example of now vs then go try to buy some cybersecurity insurance for data breaches or flood insurance.. in those circumstances things have legitimately changed!
Many people vote for parties, not individual politicians.
Unless a politician fucks up so badly that they completely ruin their party's reputation, people will keep voting for whichever candidate their favorite party endorses.
Parties have gotten clever, too. They'll quickly throw a troublemaker overboard than risk ruining the whole party's reputation. The conservatives in UK quickly got rid of Liz Truss. Few members of the People Power Party in South Korea are even trying to defend Kim Jin-tae now. Likewise, the party has more or less abandoned the head of Yongsan-gu district who is currently taking a lot of heat for October's Itaewon disaster. The party leaders are probably too busy arguing who to endorse in the readily foreseeable by-election.
I think the issue here isn't that the people winning elections have changed their views, it is that the people with bad opinions are winning elections. (In this instance the politician in question believes that the protest movement that helped bring democracy to South Korea was a North Korean operation.)
Institutionalist right wing politicians understood the value of trust, the new right all over the world is generally not institutionalist anymore, so they break things and then wonder why everyone is freaking out. When the useful idiots start to actually win elections we learn what idiots they are.
> This was a fascinating read. Is there any sort of explanation or analysis out there on why so many political leaders as of late believe they can alter the deal and then keep the same level of trust immediately afterwards?
Ignoring norms and escalating worked for Johnson, it worked for Trump, it worked for Putin, and the wealthy individuals and orgs who back them love them for it.
Johnson resigned in, somewhat, disgrace, brought about Brexit and ruined the British Economy. Trump was voted out, cost the GOP the Senate twice, mighy be indicted and risks loosing his privtae wealth. Putin started a pointless war, which he is loosing, and ruined Russia global standing, military and economy. Not sure if any of that is actual success.
It's a common flaw of democracies I find. I come from France and live in a soft dictatorship now, Hong Kong (soft because they dont beat us regularly, yet).
In France, you cannot escape expensive white elephants: the population might even vote for one, like that Airport in the middle of nowhere they wanted to revitalize the dead region. These issues become political eventually with both sides veering to the irrational to defend, or attack, the expensive project. Since we can all vote, we end up balancing left and right, project and no project, cancelling stuff half built, starting others.
In dictatorship, the absurdity is different: sometimes, no matter how silly the white elephant (the HK Macau Zuhai bridge is a good exemple: no car can ever get 3 license plates, three driving permits and three driving insurance, so no car can ever drive on it), the politicians will stubbornely see it to completion, gloat in intense glory whatever the cost overrun when it's done, and move on with the project standing there unused.
I dont know what the best model is, I only know there cannot be perfection: we cannot always take good public decisions, always stick to them, always be right about the future. We can only fail in absurd waste sometimes.
I think, some countries are broken by design, others, because of technical progress, have to change their borders and/or internal structure, but not many lucky enough to do this in time.
Countries are polarizing both on the world stage and on the domestic one. And in polarized societies (of any level) it's not uncommon to see people do things that are self defeating, so long as it's perceived as negatively affecting "the other side" even more.
The current clear demonstrations in the world, on both the global and domestic stage, are endless.
This is issue of representative democracy, by design. Representatives, sometimes have too wide rights and have not strong enough constraints, hoping, elections will choose very good guy, who will use his opportunities wisely.
But unfortunately, in real world, exists deficit of good leaders, and it is much worse on local govt level, because this is like second league (supreme league are govt of country, country parliament, top scientific organizations, military tops, and tops of top corporations).
Some experts think, direct democracy will be more reliable, but it is not implemented.
Direct, mean, ALL decisions will be made by referendum, using latest technologies - blockchain, crypto, distributed document editing, govt in smartphone, etc, so everybody will have opportunity to affect decisions.
Wow, this was so interesting. I always feel two steps behind when I read news like this? Does anyone who works in the finance sector have tips for staying up with the news? Like how do you find out that a random local government in South Korea has defaulted on its debt, how do you understand the significance of the event (as I'm sure many defaults happen every day), and how do you track the effects of these events?
Like, would you pay $2500/mo to help you make $25000/mo?
"Pricey" is subjective; and is only one number. You need another number to get the Ratio. Then we can see if Price > Gains; making $THING is expensive.
The OP is implying that by knowing such news earlier, they can take advantage of the information asymmetry to potentially arbitrage for profit (or to remove themselves from the risk earlier).
Unfortunately, this, i believe, is not feasible for the average pleb who has no insider connection/information.
I guess, why do you want to stay up to date on all sorts of stuff like this? It is more than any single human could reasonably process, even if they did it 24x7. Even people working in finance are going to be focused on fairly small areas defined by geography, industry, product type, etc..
I would like to stay up-to-date on this stuff because I find it interesting. I don't want to consume every single piece of financial news possible, but I'd like to get better at identifying important trends happening in the market before they hit the mainstream news.
Thought this was an Onion article at first... still difficult to believe that the South Koreans would let their economy get so close to the edge like that.
EDIT: Especially since "To prevent the credit market from seizing up completely, the South Korean government stepped in by providing a liquidity facility of more than 50 trillion won (about $35 billion). The Bank of Korea also injected 42.5 trillion won (about $31 billion) to stabilize the short-term bond market, and South Korea’s five largest banks also pledged to provide up to 95 trillion won (about $67 billion) in liquidity."
Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust?
Especially since S.K. is a unitary country and not federated so local governments have no sovereignty.
That rolls back the lack of trust in that specific project but does not prevent contagion (“who’s next? Who else was doing this?”)
Moves like this are supposed to be reassuring to the broader market. Punishment is something done after an error but does not guarantee that someone else also didn’t do this, and punishment doesn’t go back in time and undo actions.
If you are not decisive enough the markets can quickly spiral into contagion, however rational that may be. (See: the prolonged cascading during the Euro crisis)
The important thing to signal is not that, but that’s necessary to do later.
The important thing to signal is that investments are safe, even if other investments might fall prey to the same issue. Doing just the former means that everyone is suspicious of everything they currently hold, and will be too spooked to invest even in new perfectly good ones until they get clarity on everything, causing the market to seize up.
Justice and auditing takes time, but the need to refinance bonds is pretty much constant.
No, it's actually pretty dry compared to the real thing happened in the bond market. What it means is that no bond could be fully trusted in South Korea in the long term. Whenever political power shifted, some crazy politician can decide to default it and there's no system to stop them from doing such stuff. If you cannot trust government-issued bonds, you don't have the economical foundation at all.
> Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust?
That would help the situation, but the only solution here would be the systematic guarantee to punish such politicians but we don't have any hope for a foreseeable future since the governor is from the ruling party and was a prosecutor. South Korean prosecutors are the worst for this job, they're corrupted to the root and is a highly political entity but without being elected. I don't see any possibility of prosecuting the governor for abuse of power.
Thanks for responding, I edited my comment afterwards as I did some digging and it does seem to have seriously damaged mutual trust in SK. Not exaggerated at all by FP, my first impression was incorrect.
An important thing to keep in mind is that despite South Korea’s wealth, the sharp rise in its economy and relatively recent regime change means that its institutions are not battle-tested. This causes its markets to behave more similarly to developing markets, because the institutional trust is not there.
It also does not help that historically it was one of the worse managed Asian Tiger economies. During the 1998 crisis it was the only East Asian economy to need an IMF bailout, and it has a very well publicized revolving door of pardons for chaebol CEOs convicted of things like bribery and fraud.
> the only solution here would be the systematic guarantee to punish such politicians ...
Yeah I don't think it would work, even in principle. Being an idiot is not a crime, and you can't prosecute politicians for being grossly incompetent, unless they break the law. Besides, as you already pointed out, any such system would be abused by politicians and their supporters to "get back at" their opponents. I'm pretty sure many who voted for Yoon specifically did it to watch his predecessor Moon going to prison. (I guess they will have to keep waiting - you can like or hate Moon, but nobody made a convincing case of corruption.)
> Yeah I don't think it would work, even in principle. Being an idiot is not a crime, and you can't prosecute politicians for being grossly incompetent, unless they break the law.
Depends what you’re doing. Here in the UK, it is a crime to be an idiot if you’re a member of senior management in bank (there 10 or so “prescribed roles” that can only be held by a single individual at a time that are considered senior management).
Laws exists because wilful ignorance and deliberate idiocy was a large component of why no banker went to jail after 2008.
They should, the bad bankers getting punished helped Iceland bounce back quickly. But the SK Chaebols are really the problem. They have a house of cards built on centralized ownership through leveraged buyouts and collusion. If they don't take the Chaebols down and punish them too, the bankers will just keep going on doing what they. The government keeps pardoning the Chaebol leaders who run into the same problems regardless of their leader, father and son both have the same issues because it is systematic.
Once the trust is broken, once the taboo action is taken, it doesn’t matter if the action is reversed. There are no redos with trust in matters like that.
The Legoland theme parks are not even owned by Lego anymore.
Edit: Apparently I was wrong. Lego sold the themeparks during a downturn 20 years ago, but actually bought them back a few years ago, and now consider them a strategic part of the brand.
Wild. I would have guessed those Funco Pop toys that I see for seemingly every possible movie, game, comic book, anime, etc. That chunk of plastic feels like it must be selling for a ridiculously good margin.
> Imagine the turmoil if a newly elected president of the United States announced that the U.S. government would no longer honor any outstanding Treasury bills because most of them were issued under his profligate predecessor.
Actually, I think the reason that the Gangwon government is not going to honor outstanding debts, here, is because the value of the collateral[1] has fallen below the outstanding cost of the debt. In such a situation, any rational economic actor would at least contemplate defaulting.
[1] In this case, the collateral was land (which has plummeted in value, and the creditors are welcome to), and his government assurances (to which Kim Jin-tae seems to assign a value of ~zero.[2])
[2] Which is the real scandal, and his constituents should be looking into hemp and lamp-posts. He, in his stewardship of the region burnt down an asset of significant value for a pittance of a budget line item. Burning the furniture to stay warm, and all that.
That's a reasonable take for private businesses, and it would reflect poorly on that businesses reputation, when the government does it the trust is also lost, but there's also more consequences the bigger the starting trust was. There's a reason even with low interest rates US bonds are popular, if they default the rest of your investments are likely SOL too.
It would be more analogous to some state announcing it will not bail out a state-sponsored corporate enterprise, and instead allow it go bankrupt in a downturn. From another perspective it is sanity, protecting taxpayers from being on the hook for speculation. The entire complaint here hinges on some kind of butterfly-effect argument, plus the precise wording of a "guarantee" that was only pointed at vaguely in the article.
If the state won't follow through on it' guarantees in this case why would you assume they will on others, that guarantee is why investors are willing to take lower rates on those bonds in the first place.
>Gangwon government is not going to honor outstanding debts, here, is because the value of the collateral[1] has fallen below the outstanding cost of the debt.
Just because a deal goes badly for you, rarely do you get to kick over the table and walk away.
I'm always confused by this type of perspective. It's like asking "how is it possible to lie" or "how is it possible to say xyz"
What laws of physics prevent people from reneging on financial agreements? It happens a million times a day. It's one of the most believable human interactions. What part of it doesn't feel possible to you?
Very interesting stuff. The kind of domino effect shown here is a really great example of how much of modern economics is based off of mutual trust of the parties involved, and how that trust binds together so many disparate individuals, companies and other groups that you wouldn't otherwise expect to be involved at all.
When I heard of this story, two fanciful case studies came to mind-
The Kingdom of Scotland attempts to build a colony in modern day Panama, goes bankrupt, looks to the English for support, leading to the creation of modern day Britain as well know it.
The Soviets being scared by Reagan's far out orbital SDI promises ("the Star Wars program"), causing them to overspend on defense and eventually go bust.
Not saying anything this drastic will necessarily happen to South Korea, but it's not the first time in history that a ridiculous boondoggle led to problems for an entire nation's finances.
>...causing them to overspend on defense and eventually go bust.
I heard this in school, but it felt like post-Cold war propaganda. Is this considered a true rendition of events? By all accounts, both sides just kept ramping up spending, it was just that Russia's line of credit ended sooner.
... the Soviet Union spent a tremendous amount on S-300 antiaircraft missiles, probably enough to shoot down all the planes on Earth because they were afraid of getting bombed. This is why they won't run out in the Ukraine war and even use them against ground targets.
Similarly, I've heard opinions attributed to Gorbachev that the thing that really broke the system was costs of Chornobyl cleanup.
Another thing usually missed in the "West" is that Soviet Union pretty much never stopped being in crash industrialization mode due to how poor its starting position was.
I don't think Star Wars by itself caused the Soviets to defense spend themselves into oblivion, but it was probably a high-profile example of Reagan saber-rattling that pushed them towards that direction.
It's one of those history is fantastical examples where an odd factoid is part of a greater trend. Like how American entry into World War I is partly because of the Zimmerman Telegram- the publicizing of German diplomatic efforts to entice Mexico into an invasion of the United States.
Wonder if Legoland Korea will end up as one of those factoids.
As Ukrainian, must say, Soviets, like ANY totalitarian system, once totally broke closed loop tie with reality, and build defense against fictional creatures.
This is what differs democracy, that it have powerful and reliable closed loop tie with reality, by definition.
> American entry into World War I is partly because of the Zimmerman Telegram
Do you really think, existed any tiny chance, US would not enter World War?
From geography, it is obvious, US is on the middle between EU and South America. In such position, you should become active subject, or you will be used by anybody as object, for just transit or as base for one side (borderland).
As example, Ukraine hundreds years was borderland, and this costs ocean of Ukrainian blood.
Prior to the sinking of the Lusitania, there was no guarantee that the fairly isolationist U.S. had any interest in getting entangled into Europe’s wars.
You know, Ukraine conducted policy of self isolation, before war.
Now running to EU and NATO, because isolation costs too much, concessions don't give security.
And for US, entanglement in world policy is matter of existence, because of how Union born.
If federal govt will not protect allies, federation will fall, because states will get out and do all themselves.
Imagine, Scottish, or Irish, or Italian people, ignoring what happen in their motherland - this is impossible. and if feds will entangle in ANY european activity, they will in short time have to deal with all most powerful currents.
South America different, because nearly all countries have mostly native people, or totally cosmopolitan, so for them european currents are just performance, nothing more.
The difference is that the U.S. is separated from Europe by an ocean, has no countries with revanchist claims upon it, has a New World vs. Old World distinction, etc…
> From geography, it is obvious, US is on the middle between EU and South America
It's super jarring to see a reference to the EU as a reason for pretty much anything WWI related. I know this presumably means Europe, and maybe being used to "EU" referring to the European Union and not Europe in a general geographic sense, but I'm not used to seeing that abbreviation used for anything historically for around another half a century.
You can believe it, or not, but EU is creature of most powerful Western Europe countries (Germany and France). Other countries are passengers in this train, they have rights, but economy and geography are too powerful.
That doesn't really clear up my confusion here at all. If anything, it's even more of an argument not to refer to the continent geographically as "EU" instead of "Europe" in modern times, and certainly doesn't make it more obvious why it be referred to that way when talking about the 1910s.
> From geography, it is obvious, US is on the middle between EU and South America.
No, that’s not obvious and highly debatable. The same ocean that you cross to get from Europe to the US can take you straight to South America without touching US soil.
If you know geography and history and little sailing or (sail)planes - from Europe it is much-much easier to reach US than South America, because exists line of islands, approx from England to Canada, directly, which even have built infrastructure of airfields and ports from 1940s, and sure, there is civilization, govt and civil services.
For South America, none comparable exists, even more, on the way you will meet extremely unfriendly zone of equatorial weather, and no services.
That's obvious, if you know little more, than your keyboard and monitor, that it is very convenient and comparable safe, to use very populated and civilized path through line of islands, where you could meet lot of small ships, small planes, even helicopters, than go through open ocean.
The US just outgrew the USSR and there's no single event that caused that. [0 - keep in mind that's a log scale]
It became untenable for a relatively small economy like the USSR to compete with the US, and Regan 'turning up the heat' may have had some impact, but it was likely negligable.
The Cold War was lost because Soviet-style economic management failed vs. US Style economic management.
What may have been a somewhat equal fight in 1950 was a joke by 1988.
No. Russia overspent because it was riding on an oil boom stemming from the oil crisis, instead of having to do reforms in the 70s. Then they got poor when oil prices came down and failed to reform fast enough to counter the new budgetary realities.
Yes people overthink it but it was essentially a resource economy boom-bust cycle situation, the belief that the good times will last forever is a hell of a drug.
This is close to reality. US constantly use symmetrical approach for defense, because democracy have so huge economy advantage over totalitarian countries, so will win any direct competition.
Russia on other side, constantly looking for superweapon, which will give military advantage without prohibitively large spending's. This even got name - asymmetrical approach.
Examples of asymmetrical approach, are German U-boats, later soviet submarines with ICBMs, ICBMs, railway based ICBMs and auto based, "Poseidon" nuclear powered torpedo.
BTW, many examples of asymmetrical approach, are considered non-ethical in Western world.
It's mostly cold war propaganda, because the USSR was pouring an incredible amount of it's economic output into defense spending since WW2.
The star wars gap would have just meant that it couldn't maintain parity with the US on yet another battlefront, but nothing external was going to stop it from continuing on it's course. It would have had to reign in it's imperial ambitions some, but that is completely survivable for an industrialized nation.
What killed the USSR was Gorbachev prioritizing butter over guns, and having a shred of humanity in him, by choosing to not respond to political problems with violence. He was the real hero of the crisis, not for the things he did, but for the things he didn't do.
Wow! I love it when I read interesting things like this on HN, thank you. I never knew about the Darien scheme before, I think it's pretty fascinating:
> As the Company of Scotland was backed by approximately 20% of all the money circulating in Scotland, its failure left the entire Scottish Lowlands in financial ruin. This was an important factor in weakening their resistance to the Act of Union (completed in 1707)
> But the fallout is not limited to local government bonds; it impacts the whole of South Korea’s bond market, worth more than $2 trillion. Corporate bonds are considered less safe than local government bonds. If few buyers are brave enough to buy local government bonds under these conditions, even fewer buyers can muster enough courage to buy corporate bonds.
Can someone explain this part? While the knock-on effect on other municipal bonds makes sense, I would have expected this to make corporate bonds more attractive since the demand would have shifted?
I upvoted this story because it was interesting and fun to read, but there are a few problems with the article.
1. The author makes it seem like South Korea's credit problems are due to LegoLand announcement, rather than the global crisis of high inflation forcing governments to raise interest rates, causing projects to go bust all over. It's not clear how much of this was caused by Legoland and how much Legoland is just an example of bond market troubles after an unprecedented period of low rates that created unrealistic investor expectations of risk, and the subsequent repricing when rates start to go up. E.g. municipal debt should never be priced the same as federal government debt, because the Federal government is a currency issuer with a central bank, whereas the municipal government is a currency user, and there is nothing wrong with a project backed by a local government from declaring bankruptcy -- investors should not price that at zero risk.
2. The author (who is a lawyer, not an economist) believes that a reduction of new housing causes real estate values to fall, rather than increase.
3. The belief that high interest rates are designed to reduce "liquidity" and that therefore emergency liquidity measures somehow contradict a policy of rate hikes.
Here I will rant a bit. Use of "liquidity" in financial journalism is usually a red flag as most reporters don't understand it. They think it means "money". They view the market as a big bag in which the government dumps money when it lowers rates, or removes money from the bag when rates go up.
You see similar reporting on the stock market, which they also view as a big bag in which investors pour money in or remove money out -- forgetting that in a stock exchange, for every buyer there is a seller.
Bottom line, money going into or out of a bag is generally the only mental model available in financial journalism. There are exceptions, but you see it everywhere and it drives me crazy. This is why the author believes it's a contradiction and irony that the South Korean government would announce emergency lending facilities even as it raises rates.
But what liquidity refers to is how quickly/efficiently can you convert something into cash. For example, a liquidity crisis in the bond market means that you can't use the bond as collateral for cash loans. Bonds becoming discounted more is not a reduction in liquidity, it just means the bonds are worth less because interest rates are higher. But as long as you can use them for collateral according to their expected value, then the bond market remains "liquid" regardless of the interest rate.
When liquidity is threatened, the central bank steps in and says "We will accept these bonds as collateral for cash loans". Note that the central bank is still applying the policy discount rate, which may be high. In this article, several large banks banded together to make this announcement as well - that they would accept bonds as collateral for loans. Such a step has nothing to do with rate hikes, and does not undermine the rate hike program, it only undermines the bag-of-liquidity metaphor.
No government raises interest rates to reduce liquidity or lowers rates to increase liquidity, rate hikes are done to manage inflation and/or foreign exchange rates, whereas the tools to manage liquidity are discount windows, swap lines, and emergency lending facilities. They are separate tools with separate macroeconomic targets.
> It's not clear how much of this was caused by Legoland and how much Legoland is just an example of bond market troubles
This is actually a good point that I wasn't considering. Reading the article again I can't find the author making any substantial link between the Legoland incident and the broader effects. Seems likelier to be correlation than causation.
> It's not clear how much of this was caused by Legoland and how much Legoland is just an example of bond market troubles
It is pretty clear. Almost every single report on the bond market attributes this incident as a direct cause of the turmoil. Sentiments drive the market and this is a signal strong enough to spread FUD among the market. If you cannot trust government-issued bonds, then what else you can trust?
Of course, this is not the sole reason. Your question is more of a counterfactual reasoning, like "would it happen if the market is in a better situation". It might be better, but you are not supposed to throw embers when oil's leaking.
They were corporate bonds from a partly-govt-owned corporation. And the rating was only A1 which is good but well below the AAA that US savings bonds get. Meta just sold some bonds that got rated at A1.
No, all over interest payments for 4 months on a $150 MM bond. So, even at 12% APR, $6 MM.
But it became unstable because it suddenly made government bonds suspect. Like, if the US Treasury announced it was just not going to pay back a $1MM bond issue, the US and world markets would tank. Size is irrelevant.
Trust is priceless, as in irreplaceable. It's exactly why the laws should, maybe not make it impossible, but require a very high bar be crossed to do the sort of actions that breach that trust.
As an example. The US debt ceiling thing, it really should be the reverse. It should take a 'super majority' of congress voting against raising that ceiling to limit it, even if it's an agenda item automatically included in each session's docket.
-- Lotte world is pretty fun if you're already staying in Seoul and want to visit amusement park - if lover of amusement parks tho - E-World in Daegu = a lot of fun - tho Daegu is a boring city generally - but - Chuncheon is super easy to get to - the dakgalbi there is actually much better --
I'm mostly going to be in Seoul but I have plans for a weekend in Busan; Maybe I'll catch an early train to Daegu, stay there for a night and then onwards to Busan.
Sit tight for many such events. The world is living in a hangover of cheap credit and money for too long. Governments don't know how to govern without this anymore.
It's unbelievable the new governor cause such a turmoil on the financial market over less than 0.1% of the annual budget. Though the article said nothing about the possible causes of the move, but it is hard to believe he or any of his party didn't foresee the disaster
> The far-right politician is not known for his economic erudition, as he gained notoriety by being the standard-bearer for impeached President Park Geun-hye and claiming that the 1980 Gwangju Uprising, in which South Korea’s dictatorship massacred thousands of pro-democracy protesters, was a North Korean insurrection.
So he acts on gut instinct alone, without listening to expert advisors, and uses propaganda and fake news tactics to win supporters. Sounds a lot like several major ousted dictators.
Reap what you sow, SK. I hope you see through this BS quickly.
>> The far-right politician is not known for his economic erudition, as he gained notoriety by being the standard-bearer for impeached President Park Geun-hye and claiming that the 1980 Gwangju Uprising, in which South Korea’s dictatorship massacred thousands of pro-democracy protesters, was a North Korean insurrection.
> So he acts on gut instinct alone, without listening to expert advisors
This statement is not supported in your quote, or in the article. One can listen and disagree.
Are you suggesting that experts advices that they should default on A1 bonds even though they could clearly manage to extend and pay them? That seems highly unlikely. I don’t think any expert in the field would have such disregard for the importance of trust in the system.
Amazing. Tl, Dr: Uneducated but confident man gets power tanks economy for politics and not understanding the basics of finance (or listening to other people smarter then him).
189 comments
[ 5.5 ms ] story [ 256 ms ] threadThis is the heart of the problem.
I know the current South Korean president owes his victory in part to popular resentment in the face of the Moon administration's inability to stem the explosive growth of housing costs in Seoul.
Could it be that the target demographic for this Legoland just doesn't have enough disposable income or free time to make the asset profitable? It sure seems like it. Other Legolands around the world don't struggle with profitability. Distance isn't an issue for car owners. But cars are more expensive than ever. And shelter costs in SK are too high in proportion to household incomes.
Housing speculators and NIMBYs are going to kill capitalism.
The heart of the problem was the completely unnecessary default which seems to have been done for petty and self-defeating political reasons.
Yeah, and this is even worse since Gangwon-do is an extremely rural and aging area without any hope of future growth. It only contributes 2% of the total GDP in South Korea and is rapidly shrinking. No sane private entity would go there without government supports since none of significant development there would make financial feasibility. It's where a government is supposed to intervene.
The current governor (who was a prosecutor like Yoon anyway) seems to consider this as a really good chance to put their political opponents into jail and they need to access confidential information to make the case. The default is a necessary part for the grand scheme and he probably was willing to make that sacrifice. He was just not competent enough to understand its implication.
Builders bulldozing over irreplaceable ancient sites are not exactly unique to Korea, after all. (At least this one got excavated.)
No arguments with the sentiment, but keep in mind that South Korea is roughly the size of Indiana (the 12th-smallest state) and over two-thirds of what land they have is mountainous, populated by over 50 million people. It's hard not to have relatively expensive housing in that country, just based on the sheer lack of availability of land.
Of course, it doesn't help that half the country lives in the Seoul Capital Area.
I know this happens occasionally and I may just be seeing a pattern that’s not there, but it seems like a noticeable uptick in leaders who don’t understand why people they just fucked over won’t trust their IOUs anymore
The belief that you can wish debt away is rooted in the Keynesianism/Reaganomics of the past five decades. MMT basically just accepts the realpolitik that the enormous handouts to the financial industry will never be stopped, and says that we might as well use some of the new money deliberately. From my economically conservative Austrian perspective, at least MMT appears intellectually honest. MMT also corrects/shortens the feedback path from monetary creation to price inflation, rather than relying on the roundabout feedback path that has created this ever-growing asset bubble.
I advocate replacing slow burning inflation with negative interest on cash. When that is done, debts can be repaid.
MMT is attractive to essentially all politicians. It says you can spend without consequences. You don't have to spend that on a welfare state although many MMT advocates take this line. You could just as easy spend it on the military or surveillance.
Really? I thought it said that money exists because a government prints it, so a government cannot default on a debt denominated in its currency unless it chooses to, and that inflation is a second order effect resulting from the money supply increasing faster than the pool of goods and services it's chasing.
The name implies that it is mainstream modern economics, but it isn’t.
So the entirety of that statement is toothless.
The second order effects that limit money creation are highly fluid but the fact that governments with their own currency cannot default is set in stone.
Well, inflation is currently sky-fucking high, so right now is when MMT would say you do have to worry about deficits and debt.
Our politicians are bribed, bullied and intimated to enrich a few at the expensive of us all.
Every single election is completely corrupt, do you really think all those billions that they pay to ALL parties are for nothing in return.
And if you don't toe the line you will be punished.
When you realise that this is the case all the insanity makes sense. Where BLM supporters will gladly provide awards for individuals with actual swastikas on their skin. Where states will move to completely deindustrialisation without consultation of the citizens. Where countries won't grow their own food. Where they buy the debt of the those that are oppressing them.
It's all madness until you realise we are all without sovereignty.
But I'm not allowed to even question it, as your comment shows and the flagging of these facts.
You all need to wake up, you are cattle.
Big economic/political/tech shifts leave people mistrusting old institutions that naturally aren’t well equipped to handle the new situation. The institutions screw up, electors lose trust, and new folks take over. The new folks (being new, and sometimes being the less-competent rejects) tend to misunderstand the institution, and change things that aren’t necessary; they overreact.
What you’re seeing is just the overreactions: they’re knocking out walls, and sometimes they hit the wrong wall.
But you also don’t see the benefits because effective bureaucratic adaptation is boring.
The thing I wonder about is if the seeming endless screw ups are because we have more change today, more morons, or we just see it all more.
We're using the wrong language, the wrong source control, the wrong methodologies, the wrong libraries, and so on.
If the flavor of the month is say BoringSSL we should be working to switch all our code from OpenSSL and so on.
Usualy it takes a bit of effort to bring them up to speed. There are positives and negatives to all choices. Usually I assign them the task of coming up with 5 downsides to their suggestions.
Articulating the downsides helps to show you understand the whole impact of an idea, and thus aren't making a "buying the koolaid" decision simply based on popular opinion.
When they win, they are bad at their jobs.
Was really glad that this article mentioned Liz Truss at the end, because I think the dynamics are absolutely the same. It was painfully obvious (indeed, the current PM made it clear in the summer) that cutting taxes, and having no way to pay for them, in the midst of rampant inflation is an idiotic idea. I read elsewhere that it's almost as if Truss and Kwarteng formed a pact in college saying, "if we ever make it to the top of government, we'll prove that supply side ideology works!", and then completely disregarded the current economic climate.
I just see it more and more over the past decade or so that things that you know are not going to end well (see also crypto deposits paying 10% interest) somehow snowball because it's easier to surround yourself with "ideological cultism".
Let's see what happens here in the U.S. :-/
I can definitely understand arguments and debates around the proper level of taxation. But while it may be acceptable and even a good idea to substantially lower taxes and raise the deficit during periods of low inflation, it is the height of idiocy to do that during a period of high inflation.
“CBO estimates that Public Law 117-169 will result in a net decrease in the unified deficit totaling $58.1 billion over the 2022-2031 period. That decrease in the deficit is estimated to result from an increase in direct spending of $50.6 billion and an increase in revenues of $108.7 billion.”
https://www.cbo.gov/publication/58455
Money needs to be taken out of circulation, not added.
... and who has a large balance of historical debt?
A similar reversal of roles can be seen in Germany, where the greens economics minister surprised the business community with effective solution oriented "realpolitik" and the free Liberal (a pro business/free market party) finance minister is blocking decisions for purely ideological reasons often against the recommendations of large portions of the business community.
https://www.spectator.co.uk/article/liz-truss-hasn-t-underst...
This is just statist feudalism exposed.
Modern technology is also amplifying populism, which is who the word 'Truss' ends up in all of this, because however much one may agree or disagree with the contents or orientation of the mini-budget, it was woefully misrepresented in the press (almost universally) in an excessively populist manner.
https://qz.com/1274875/how-argentina-went-from-selling-100-y...
But my point is more that investors haven't blacklisted them forever, just because of prior defaults.
I don't know whether the interest on this particular bond is still being paid at the quoted rate, or if it was "restructured", since they did default again in 2020:
https://www.dw.com/en/argentina-in-default-for-second-time-t...
If the current high-inflation, high interest rate environment sticks around, a whole lot of things are going to end up very different, because the bond investors won't be so desperate for yield and so there will be a penalty for disrespecting the bond market. If it doesn't stick around (which seems to be the current aggregated guess of the bond market) then this will be a brief blip. Trillions of dollars rest on the answer to that question.
If you want an example of now vs then go try to buy some cybersecurity insurance for data breaches or flood insurance.. in those circumstances things have legitimately changed!
Unless a politician fucks up so badly that they completely ruin their party's reputation, people will keep voting for whichever candidate their favorite party endorses.
Parties have gotten clever, too. They'll quickly throw a troublemaker overboard than risk ruining the whole party's reputation. The conservatives in UK quickly got rid of Liz Truss. Few members of the People Power Party in South Korea are even trying to defend Kim Jin-tae now. Likewise, the party has more or less abandoned the head of Yongsan-gu district who is currently taking a lot of heat for October's Itaewon disaster. The party leaders are probably too busy arguing who to endorse in the readily foreseeable by-election.
Institutionalist right wing politicians understood the value of trust, the new right all over the world is generally not institutionalist anymore, so they break things and then wonder why everyone is freaking out. When the useful idiots start to actually win elections we learn what idiots they are.
Ignoring norms and escalating worked for Johnson, it worked for Trump, it worked for Putin, and the wealthy individuals and orgs who back them love them for it.
In France, you cannot escape expensive white elephants: the population might even vote for one, like that Airport in the middle of nowhere they wanted to revitalize the dead region. These issues become political eventually with both sides veering to the irrational to defend, or attack, the expensive project. Since we can all vote, we end up balancing left and right, project and no project, cancelling stuff half built, starting others.
In dictatorship, the absurdity is different: sometimes, no matter how silly the white elephant (the HK Macau Zuhai bridge is a good exemple: no car can ever get 3 license plates, three driving permits and three driving insurance, so no car can ever drive on it), the politicians will stubbornely see it to completion, gloat in intense glory whatever the cost overrun when it's done, and move on with the project standing there unused.
I dont know what the best model is, I only know there cannot be perfection: we cannot always take good public decisions, always stick to them, always be right about the future. We can only fail in absurd waste sometimes.
I think, some countries are broken by design, others, because of technical progress, have to change their borders and/or internal structure, but not many lucky enough to do this in time.
The current clear demonstrations in the world, on both the global and domestic stage, are endless.
But unfortunately, in real world, exists deficit of good leaders, and it is much worse on local govt level, because this is like second league (supreme league are govt of country, country parliament, top scientific organizations, military tops, and tops of top corporations).
Direct, mean, ALL decisions will be made by referendum, using latest technologies - blockchain, crypto, distributed document editing, govt in smartphone, etc, so everybody will have opportunity to affect decisions.
I think, this is more question of right geography, so will not work https://en.wikipedia.org/wiki/Gerrymandering
Goofy American: Why don't they just print more money?
Like, would you pay $2500/mo to help you make $25000/mo?
"Pricey" is subjective; and is only one number. You need another number to get the Ratio. Then we can see if Price > Gains; making $THING is expensive.
I'm sure, but you recommended it to someone who just wanted to be more informed about financial news. For that person, it is extremely pricey.
Elon, you listening bro?
Your best bet is to find things like HN or commentators you like; remember, most of this is entertainment for you unless you're actively involved.
Unfortunately, this, i believe, is not feasible for the average pleb who has no insider connection/information.
https://www.youtube.com/@PBoyle
https://en.wikipedia.org/wiki/Financial_Times
They're both quite funny. Both have a very dry wit, though Boyle moreso.
[1] https://www.bloomberg.com/authors/ARbTQlRLRjE/matthew-s-levi...
[2] https://www.youtube.com/c/PatrickBoyleOnFinance
EDIT: Especially since "To prevent the credit market from seizing up completely, the South Korean government stepped in by providing a liquidity facility of more than 50 trillion won (about $35 billion). The Bank of Korea also injected 42.5 trillion won (about $31 billion) to stabilize the short-term bond market, and South Korea’s five largest banks also pledged to provide up to 95 trillion won (about $67 billion) in liquidity."
Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust?
Especially since S.K. is a unitary country and not federated so local governments have no sovereignty.
Moves like this are supposed to be reassuring to the broader market. Punishment is something done after an error but does not guarantee that someone else also didn’t do this, and punishment doesn’t go back in time and undo actions.
If you are not decisive enough the markets can quickly spiral into contagion, however rational that may be. (See: the prolonged cascading during the Euro crisis)
The important thing to signal is that investments are safe, even if other investments might fall prey to the same issue. Doing just the former means that everyone is suspicious of everything they currently hold, and will be too spooked to invest even in new perfectly good ones until they get clarity on everything, causing the market to seize up.
Justice and auditing takes time, but the need to refinance bonds is pretty much constant.
> Wouldn't it have been easier to retract the policy of the local government, sack the local leaders, etc., to rollback the loss of trust?
That would help the situation, but the only solution here would be the systematic guarantee to punish such politicians but we don't have any hope for a foreseeable future since the governor is from the ruling party and was a prosecutor. South Korean prosecutors are the worst for this job, they're corrupted to the root and is a highly political entity but without being elected. I don't see any possibility of prosecuting the governor for abuse of power.
It also does not help that historically it was one of the worse managed Asian Tiger economies. During the 1998 crisis it was the only East Asian economy to need an IMF bailout, and it has a very well publicized revolving door of pardons for chaebol CEOs convicted of things like bribery and fraud.
Yeah I don't think it would work, even in principle. Being an idiot is not a crime, and you can't prosecute politicians for being grossly incompetent, unless they break the law. Besides, as you already pointed out, any such system would be abused by politicians and their supporters to "get back at" their opponents. I'm pretty sure many who voted for Yoon specifically did it to watch his predecessor Moon going to prison. (I guess they will have to keep waiting - you can like or hate Moon, but nobody made a convincing case of corruption.)
Depends what you’re doing. Here in the UK, it is a crime to be an idiot if you’re a member of senior management in bank (there 10 or so “prescribed roles” that can only be held by a single individual at a time that are considered senior management).
Laws exists because wilful ignorance and deliberate idiocy was a large component of why no banker went to jail after 2008.
Criminal negligence is a thing [0]. It's just not applied to politicians yet (probably because they write the laws).
[0] https://en.wikipedia.org/wiki/Criminal_negligence
Where, in Asia, is something like this not a problem?
That's what I thought too. Central government coming in to make it clear that local governments have to honor their word without exception.
Edit: Apparently I was wrong. Lego sold the themeparks during a downturn 20 years ago, but actually bought them back a few years ago, and now consider them a strategic part of the brand.
Actually, I think the reason that the Gangwon government is not going to honor outstanding debts, here, is because the value of the collateral[1] has fallen below the outstanding cost of the debt. In such a situation, any rational economic actor would at least contemplate defaulting.
[1] In this case, the collateral was land (which has plummeted in value, and the creditors are welcome to), and his government assurances (to which Kim Jin-tae seems to assign a value of ~zero.[2])
[2] Which is the real scandal, and his constituents should be looking into hemp and lamp-posts. He, in his stewardship of the region burnt down an asset of significant value for a pittance of a budget line item. Burning the furniture to stay warm, and all that.
The US faced similar issues previously before the federal government stepped in and outlawed states defaulting. https://en.wikipedia.org/wiki/State_defaults_in_the_United_S...
Just because a deal goes badly for you, rarely do you get to kick over the table and walk away.
What laws of physics prevent people from reneging on financial agreements? It happens a million times a day. It's one of the most believable human interactions. What part of it doesn't feel possible to you?
If a US state governor OTOH tried such a move, I'd expect litigation.
The Kingdom of Scotland attempts to build a colony in modern day Panama, goes bankrupt, looks to the English for support, leading to the creation of modern day Britain as well know it.
https://en.wikipedia.org/wiki/Darien_scheme
The Soviets being scared by Reagan's far out orbital SDI promises ("the Star Wars program"), causing them to overspend on defense and eventually go bust.
https://en.wikipedia.org/wiki/Strategic_Defense_Initiative
Not saying anything this drastic will necessarily happen to South Korea, but it's not the first time in history that a ridiculous boondoggle led to problems for an entire nation's finances.
I heard this in school, but it felt like post-Cold war propaganda. Is this considered a true rendition of events? By all accounts, both sides just kept ramping up spending, it was just that Russia's line of credit ended sooner.
Another thing usually missed in the "West" is that Soviet Union pretty much never stopped being in crash industrialization mode due to how poor its starting position was.
It's one of those history is fantastical examples where an odd factoid is part of a greater trend. Like how American entry into World War I is partly because of the Zimmerman Telegram- the publicizing of German diplomatic efforts to entice Mexico into an invasion of the United States.
Wonder if Legoland Korea will end up as one of those factoids.
This is what differs democracy, that it have powerful and reliable closed loop tie with reality, by definition.
Do you really think, existed any tiny chance, US would not enter World War?
From geography, it is obvious, US is on the middle between EU and South America. In such position, you should become active subject, or you will be used by anybody as object, for just transit or as base for one side (borderland).
As example, Ukraine hundreds years was borderland, and this costs ocean of Ukrainian blood.
Now running to EU and NATO, because isolation costs too much, concessions don't give security.
And for US, entanglement in world policy is matter of existence, because of how Union born. If federal govt will not protect allies, federation will fall, because states will get out and do all themselves.
Imagine, Scottish, or Irish, or Italian people, ignoring what happen in their motherland - this is impossible. and if feds will entangle in ANY european activity, they will in short time have to deal with all most powerful currents.
South America different, because nearly all countries have mostly native people, or totally cosmopolitan, so for them european currents are just performance, nothing more.
It's super jarring to see a reference to the EU as a reason for pretty much anything WWI related. I know this presumably means Europe, and maybe being used to "EU" referring to the European Union and not Europe in a general geographic sense, but I'm not used to seeing that abbreviation used for anything historically for around another half a century.
- If you know history, in 1910s, edge lies not on continent borders, but on totally different matters.
No, that’s not obvious and highly debatable. The same ocean that you cross to get from Europe to the US can take you straight to South America without touching US soil.
If you know geography and history and little sailing or (sail)planes - from Europe it is much-much easier to reach US than South America, because exists line of islands, approx from England to Canada, directly, which even have built infrastructure of airfields and ports from 1940s, and sure, there is civilization, govt and civil services.
For South America, none comparable exists, even more, on the way you will meet extremely unfriendly zone of equatorial weather, and no services.
It became untenable for a relatively small economy like the USSR to compete with the US, and Regan 'turning up the heat' may have had some impact, but it was likely negligable.
The Cold War was lost because Soviet-style economic management failed vs. US Style economic management.
What may have been a somewhat equal fight in 1950 was a joke by 1988.
[0] https://cepr.org/sites/default/files/styles/flexible_wysiwyg...
Russia on other side, constantly looking for superweapon, which will give military advantage without prohibitively large spending's. This even got name - asymmetrical approach.
Examples of asymmetrical approach, are German U-boats, later soviet submarines with ICBMs, ICBMs, railway based ICBMs and auto based, "Poseidon" nuclear powered torpedo.
BTW, many examples of asymmetrical approach, are considered non-ethical in Western world.
The star wars gap would have just meant that it couldn't maintain parity with the US on yet another battlefront, but nothing external was going to stop it from continuing on it's course. It would have had to reign in it's imperial ambitions some, but that is completely survivable for an industrialized nation.
What killed the USSR was Gorbachev prioritizing butter over guns, and having a shred of humanity in him, by choosing to not respond to political problems with violence. He was the real hero of the crisis, not for the things he did, but for the things he didn't do.
> As the Company of Scotland was backed by approximately 20% of all the money circulating in Scotland, its failure left the entire Scottish Lowlands in financial ruin. This was an important factor in weakening their resistance to the Act of Union (completed in 1707)
Can someone explain this part? While the knock-on effect on other municipal bonds makes sense, I would have expected this to make corporate bonds more attractive since the demand would have shifted?
1. The author makes it seem like South Korea's credit problems are due to LegoLand announcement, rather than the global crisis of high inflation forcing governments to raise interest rates, causing projects to go bust all over. It's not clear how much of this was caused by Legoland and how much Legoland is just an example of bond market troubles after an unprecedented period of low rates that created unrealistic investor expectations of risk, and the subsequent repricing when rates start to go up. E.g. municipal debt should never be priced the same as federal government debt, because the Federal government is a currency issuer with a central bank, whereas the municipal government is a currency user, and there is nothing wrong with a project backed by a local government from declaring bankruptcy -- investors should not price that at zero risk.
2. The author (who is a lawyer, not an economist) believes that a reduction of new housing causes real estate values to fall, rather than increase.
3. The belief that high interest rates are designed to reduce "liquidity" and that therefore emergency liquidity measures somehow contradict a policy of rate hikes.
Here I will rant a bit. Use of "liquidity" in financial journalism is usually a red flag as most reporters don't understand it. They think it means "money". They view the market as a big bag in which the government dumps money when it lowers rates, or removes money from the bag when rates go up.
You see similar reporting on the stock market, which they also view as a big bag in which investors pour money in or remove money out -- forgetting that in a stock exchange, for every buyer there is a seller.
Bottom line, money going into or out of a bag is generally the only mental model available in financial journalism. There are exceptions, but you see it everywhere and it drives me crazy. This is why the author believes it's a contradiction and irony that the South Korean government would announce emergency lending facilities even as it raises rates.
But what liquidity refers to is how quickly/efficiently can you convert something into cash. For example, a liquidity crisis in the bond market means that you can't use the bond as collateral for cash loans. Bonds becoming discounted more is not a reduction in liquidity, it just means the bonds are worth less because interest rates are higher. But as long as you can use them for collateral according to their expected value, then the bond market remains "liquid" regardless of the interest rate.
When liquidity is threatened, the central bank steps in and says "We will accept these bonds as collateral for cash loans". Note that the central bank is still applying the policy discount rate, which may be high. In this article, several large banks banded together to make this announcement as well - that they would accept bonds as collateral for loans. Such a step has nothing to do with rate hikes, and does not undermine the rate hike program, it only undermines the bag-of-liquidity metaphor.
No government raises interest rates to reduce liquidity or lowers rates to increase liquidity, rate hikes are done to manage inflation and/or foreign exchange rates, whereas the tools to manage liquidity are discount windows, swap lines, and emergency lending facilities. They are separate tools with separate macroeconomic targets.
This is actually a good point that I wasn't considering. Reading the article again I can't find the author making any substantial link between the Legoland incident and the broader effects. Seems likelier to be correlation than causation.
It is pretty clear. Almost every single report on the bond market attributes this incident as a direct cause of the turmoil. Sentiments drive the market and this is a signal strong enough to spread FUD among the market. If you cannot trust government-issued bonds, then what else you can trust?
Of course, this is not the sole reason. Your question is more of a counterfactual reasoning, like "would it happen if the market is in a better situation". It might be better, but you are not supposed to throw embers when oil's leaking.
A good reminder how we take for granted systems that are stable. When often time they are only stable because of vigilance.
But it became unstable because it suddenly made government bonds suspect. Like, if the US Treasury announced it was just not going to pay back a $1MM bond issue, the US and world markets would tank. Size is irrelevant.
As an example. The US debt ceiling thing, it really should be the reverse. It should take a 'super majority' of congress voting against raising that ceiling to limit it, even if it's an agenda item automatically included in each session's docket.
So he acts on gut instinct alone, without listening to expert advisors, and uses propaganda and fake news tactics to win supporters. Sounds a lot like several major ousted dictators.
Reap what you sow, SK. I hope you see through this BS quickly.
> So he acts on gut instinct alone, without listening to expert advisors
This statement is not supported in your quote, or in the article. One can listen and disagree.
Honestly whats happening to this world.
But Truss wasn't elected (by the voters of UK).