The impossible problem of dealing with forty million unsold units...
When everyone had fallen silent, one man opened his mouth.
-We need... we need some time.
Director Kang turned his head toward him.
“Time?”
-Yes. Of course there are many distressed unsold units, but that does not mean our real economy is in a slump. Indicators for manufacturing, services, and technological capability are still respectable. In truth, isn’t the current real estate downturn ultimately because our people’s purchasing power cannot keep up? If the economy grows, the people’s purchasing power will rise as well, and that will naturally lead to resolving the unsold inventory.
“You’re saying we should extend the construction companies’ maturities a little?”
-Yes. If we try to solve the problem all at once, we don’t know what side effects it might cause. For now, if we extend their bonds bit by bit and try to induce a soft landing...
“So until when should we do that? Ten years? Twenty? Thirty?”
-...Pardon?
Bang!
“Letting them off, saving them, keeping them on life support until it burst—that was Japan! The wrong answer is staring us in the face, and you want us to have a lost thirty years too?!”
Japan’s lost economy was not solely because of the Plaza Accord.
It was certainly the trigger, but the fact that it lasted thirty years was clearly due to misjudgments in economic policy.
After being hit by another kind of nuclear bomb from the United States, they issued bonds to avoid an immediate downturn and lowered interest rates all the way into negative territory. It was understandable, since real estate had crashed by as much as ninety percent, and they had to put out the urgent fire somehow.
But that low-interest, fiscal-expansion stance continued until their debt reached ten quadrillion won, until their debt-to-GDP ratio hit two hundred percent, so there was no way the economy could remain intact.
Japan missed its golden time and kept drinking seawater by printing money, and as a result, even companies that truly needed restructuring were kept alive. That was the secret behind twenty straight years of zero growth, stuck in the zero-percent range.
It was true that they had been in a serious traffic accident, but because they were too afraid to go to the hospital, they held out and ended up lying in bed for thirty years.
“Let me be clear. The Party’s position is one thing! Even if it’s a bit rough, it must be surgical intervention that can solve this problem as quickly as possible!”
As everyone lowered their heads, the deputy director cautiously opened his mouth.
“With all due respect, Director. Restructuring is not a cure-all.”
“What?”
“Refusing surgery because you’re afraid of the pain is a problem, but refusing anesthesia because you’re afraid of becoming addicted to narcotics is an even bigger problem. Appropriate painkillers and appropriate surgery. Our Statistics Bureau must find the optimal point of balance.”
Director Kang glared at the deputy director, who refused to back down.
“‘Appropriate,’ is it? Sounds nice. Then say it yourself. What is the most appropriate course?”
“First, it is important to properly grasp the true state of our distressed unsold inventory. During subprime, the United States had roughly three million distressed unsold homes, which, accounting for population structure, should be understood as about fifteen million.”
“Then doesn’t that mean we are three times worse off than the United States was back then?”
“Yes. That is why there is no way we can avoid injecting fiscal funds. At the time, both the White House and the Fed lowered interest rates and extended maturities. Lehman was allowed to fail, but there were far more companies that were not allowed to go bankrupt.”
Director Kang pressed his fingers to his brow and let out a deep sigh.
Because he knew all too well what the next words would be.
“...You’re saying we need fiscal spending?”
“Yes. If we cannot lower interest rates, we must at least inject fiscal funds. To be frank, the reason real estate still remains in a slump when by now there should have been signs of recovery, I believe, is because of the Party’s purchase of Russian bonds.”
“...”
“If that money had been used for domestic stimulus, our real estate market would have entered a recovery phase by now.”
China had gained the buffer zone called Russia, but the losses were immense. Namely, hundreds of trillions of won in Russian bonds.
At present, global ratings agencies estimated China’s Russian bond holdings to be in the two-hundred-trillion-won range, and the general opinion was that they would not be recovered.
Director Kang turned his head and examined the faces of the Statistics Bureau executives.
“...”
They all wore the same expression.
If that money had been spent on supporting domestic real estate, at the very least, there would have been signs of recovery by now. They had gained a buffer zone against Europe, but two hundred trillion was far too expensive a bunker.
“Deputy Director, watch your mouth all the same. I may be broad-minded, but if someone else had heard that, it could have been interpreted as treason.”
“That was not my meaning, but... I apologize.”
“Enough. Everyone here seems to have the same expression, so I suppose there are no objections?”
Director Kang set down his pen.
“The Party has already sent word. The war issue is now concluded, so those assets will be used for domestic economic stimulus. The bonds Russia repays will be put in as they come in as well.”
-With all due respect, Director, it is not enough.
“Not enough?”
-It is unclear whether Russia will repay them at all, but even if they repay everything, it will fall far short.
With that as the beginning, every executive in the Statistics Bureau rose up.
-That is correct. To clean this up now, we need a much larger budget. We cannot simply rely on Russia when we don’t even know whether they will repay or not.
“Then what are you suggesting?”
-We must expand government spending further.
“Are you telling me to cut other budgets and use that to prop up real estate?”
-We have to put out the urgent fire, don’t we?
-That’s right. We must tighten almost every budget, including R&D, and use it to support real estate. If we do not spend money on real estate support, this problem will keep dragging down our economic growth rate from now on.
-In fact, several global ratings agencies have already projected China’s potential growth rate below five percent. The reason it keeps being revised downward is the contraction in real estate.
-Director. This is not a matter of choice, but survival. Please persuade the Party.
Director Kang glared at the executives once, but their faces did not waver.
He folded his arms and let out a deep sigh.
They were telling him to cut a significant portion of the government budget and invest it in real estate... Then what budget was he supposed to ask them to cut, and how?
*
The subprime crisis that began in 2007 changed the global economic landscape considerably.
Because of the unsold homes that at one point reached three million units, the Fed and the White House used a money-printing policy.
In September 2007, the U.S. interest rate, which had been nearly five percent, became a zero interest rate in just one year, and even then, with no answer in sight, they ultimately allowed the colossal company called Lehman to go bankrupt. Because of the aftereffects that arose then, even the United States under heaven suffered a lost five years, so it was worthy of being called the twenty-first-century version of the Great Depression.
But if there are people crying, there are also people laughing.
At the time, China, hiding its strength and biding its time while watching for an opportunity, achieved double-digit growth despite the global recession.
Starting from 9.7 percent just before the financial crisis, it wrote the legend of four straight years of growth in the ten-percent range.
Of course, developing countries sometimes record double-digit growth, but China was somewhat different. A population of over one billion posting double-digit growth was a first in human history. India, which has similar conditions, has still never shown such a record, so China’s rise could be assessed as a success in its own way.
But it seems that what China truly gained during subprime was something else.
At the time, the United States was too busy putting out the fire in its own burning house to pay attention to other countries, and China’s manufacturing industry took advantage of that opportunity to swallow up every factory.
It may have been one of the first economic blunders in which the United States, a country that would even trample an ally like Japan if it threatened its hegemony, was rendered nearly helpless.
The manufacturing jobs thus taken away expanded China’s domestic demand, and China used that as a foundation to invest aggressively in R&D. As a result, it is now competing with the United States for the lead in almost every field.
There are no ifs in history, but I am curious.
If the United States had not been struggling with subprime back then, if it had fostered a country like India in advance as a counterweight to keep China in check, would the balance of power be different now?
To be honest, I no longer know.
During the Cold War, the United States seemed like a country that thought on a very high level and coldly weighed gains and losses, but these days it is busy beating up its allies. After the Iraq War, it seems to have become a country where emotion comes before reason.
The United States was the country that waged a one-quadrillion-won war because Hussein was offensive to them, so even if they went back to 2008, I doubt the result would have changed.
“What? Robotics?”
“Yes. It is a startup with considerable prospects.”
“Prospects or whatever, our pension fund doesn’t touch unlisted shares. Even if we buy any, we buy things like affiliates or holding companies of our conglomerates. We can’t invest this kind of money in an American startup.”
That was why the current crisis in China looked to me like a once-in-a-lifetime opportunity for us.
Even the almighty United States missed its chance to contain China while cleaning up the subprime mess. Conversely, China, currently wracking its brains over real estate, was an opportunity for us.
If my memory was correct, China was currently forced to pour enormous fiscal resources into supporting real estate. Now was the perfect opportunity for us to catch up in areas where we had fallen behind and widen the gap even further in areas where we were ahead.
“Then, Department Head Oh, let’s change the principle.”
“What?”
“In the world of investment, high risk and high return are unavoidable, aren’t they? It’s a good company. At last year’s technology presentation, it showed fairly innovative technology, so Wall Street is already paying attention to it. We have to acquire a stake before its potential becomes more obvious if we want to do it at the cheapest price.”
Department Head Oh folded his arms and looked me over.
“Fairly innovative technology?”
“Yes!”
“Fine. Then why has such an amazing company not received investment offers from Big Tech yet?”
“That’s...”
“To be blunt, the ones with the best eye for this industry are the Big Tech companies. Those so-called outstanding investors? They’re good at reciting theory, but the ones who can recognize real technological capability are the people in the business. So why has this company not received even a single love call from Big Tech?”
I answered in a dispirited voice.
“The technology is truly good...”
“But?”
“The unit cost hasn’t been resolved yet...”
“Then the technology isn’t good.”
“Department Head!”
Department Head Oh waved his hand as if there was nothing more to discuss.
“Hey, Team Leader Lee. Right now in Silicon Valley, cars are flying through the sky. But they cost one billion won each. Would you buy one?”
“That’s not it...”
“Not it, my foot. No matter how good the technology is, if you can’t meet the unit cost, it’s just one of the rich’s peculiar collectibles. Looking at the financial statements, it costs at least ten billion dollars to make one robot. Do you know how many Chinese laborers you could hire with that money?”
I smiled bitterly as I answered.
“Department Head... how long do you think Chinese labor costs will stay cheap?”
“If China gets expensive, next there’s India. If India gets expensive, there’s Africa.”
“If that kind of comparison were all it took, none of the Big Tech companies would be developing robots.”
“What?”
“Department Head. I guarantee it. In three months, when this company goes public and its process system is revealed, the Big Tech companies will compete to send love calls. Please trust me. It is a promising company.”
After falling into thought for a long while, Department Head Oh folded his arms again and raised his eyebrows.
“How do you know that?”