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
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".
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 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.
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.
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.
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.
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.
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).
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.
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.
> 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.
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.
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)
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.
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.
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.
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)
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.
> 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.
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?
> 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.
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.
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.
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
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
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.
> 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.
> 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?
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.
> 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.
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).
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?
[+] [-] gnabgib|3 years ago|reply
[+] [-] lovich|3 years ago|reply
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
[+] [-] hn_throwaway_99|3 years ago|reply
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".
[+] [-] curiousllama|3 years ago|reply
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.
[+] [-] mandevil|3 years ago|reply
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.
[+] [-] rvba|3 years ago|reply
When they win, they are bad at their jobs.
[+] [-] xwolfi|3 years ago|reply
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.
[+] [-] incompatible|3 years ago|reply
https://qz.com/1274875/how-argentina-went-from-selling-100-y...
[+] [-] somenameforme|3 years ago|reply
The current clear demonstrations in the world, on both the global and domestic stage, are endless.
[+] [-] simne|3 years ago|reply
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
[+] [-] simne|3 years ago|reply
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).
[+] [-] JamisonM|3 years ago|reply
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.
[+] [-] kijin|3 years ago|reply
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.
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] rodgerd|3 years ago|reply
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.
[+] [-] Guthur|3 years ago|reply
[deleted]
[+] [-] halpmeh|3 years ago|reply
[+] [-] Apocryphon|3 years ago|reply
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.
[+] [-] fbdab103|3 years ago|reply
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.
[+] [-] hn_throwaway_99|3 years ago|reply
> 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)
[+] [-] MichaelZuo|3 years ago|reply
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.
[+] [-] summerlight|3 years ago|reply
> 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.
[+] [-] downrightmike|3 years ago|reply
[+] [-] bobthepanda|3 years ago|reply
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)
[+] [-] somedude895|3 years ago|reply
That's what I thought too. Central government coming in to make it clear that local governments have to honor their word without exception.
[+] [-] mint2|3 years ago|reply
[+] [-] Victerius|3 years ago|reply
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.
[+] [-] halpmeh|3 years ago|reply
[+] [-] giggyhack|3 years ago|reply
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.
[+] [-] microtherion|3 years ago|reply
[+] [-] Night_Thastus|3 years ago|reply
[+] [-] legitster|3 years ago|reply
A good reminder how we take for granted systems that are stable. When often time they are only stable because of vigilance.
[+] [-] HWR_14|3 years ago|reply
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.
[+] [-] leemailll|3 years ago|reply
[+] [-] rsj_hn|3 years ago|reply
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.
[+] [-] summerlight|3 years ago|reply
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.
[+] [-] somedude895|3 years ago|reply
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.
[+] [-] cvalka|3 years ago|reply
[+] [-] tqi|3 years ago|reply
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?
[+] [-] 627467|3 years ago|reply
[+] [-] GauntletWizard|3 years ago|reply
[+] [-] anm89|3 years ago|reply
[+] [-] vkou|3 years ago|reply
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.
[+] [-] boringg|3 years ago|reply
Honestly whats happening to this world.
[+] [-] jontro|3 years ago|reply
[+] [-] everybodyknows|3 years ago|reply
If a US state governor OTOH tried such a move, I'd expect litigation.
[+] [-] 627467|3 years ago|reply
[+] [-] anm89|3 years ago|reply
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?
[+] [-] datavirtue|3 years ago|reply
Goofy American: Why don't they just print more money?
[+] [-] tokai|3 years ago|reply
But Truss wasn't elected (by the voters of UK).