October 29, 2000

Ireland looks like Japan before the bubble burst

Posted in Celtic Tiger · 6 comments ·

Can a highly competitive economy with record export growth and growing international market share go into a slump? It certainly can. Japan is now in its tenth year of economic stagnation, banks are still filing for bankruptcy and, throughout the economy, bad debts continue to rise.

Ten years ago it was all so different. When I was in college, a particularly ambitious set of business students who used to wear suits to lectures (a true sign of recession) began taking private Japanese lessons. If you didn’t have a grasp of Japanese or at least a smattering, the view was you might as well quit now and not even bother turning up for final year interviews.

We sat there, petrified, as professor after professor told us about the threat of Japan to our careers (not that the class of 1988 appeared to have a particularly stellar future ahead of them in the first place). Every airport waiting-lounge was stuffed with hardback tomes heralding the rise and rise of the land of the rising sun and no economics exam questionnaire was complete without the obligatory question: “Explain the fundamental economic reasons behind Japanese world economic domination”.

Japan of the late 1980s was experiencing a huge asset price boom and stocks were going through the roof, allowing Japanese companies to buy trophy assets abroad such as the Rockefeller Centre and MGM. Bulging Japanese banks dwarfed their European and US counterparts and threatened to dominate in the City and Wall Street. Most spectacular of all was the Tokyo property market. In 1990, the land upon which the imperial palace in Tokyo was built was valued at more than the entire real estate of Canada, the second largest country in the world.

So what went wrong? Why is Japan down in the dumps and why did the world’s most awesome economic power crumble in a matter of a few years? More interestingly, if global competitiveness is so important, how come Japan continued to have the world’s largest trade surplus, never dropping a notch in competitiveness throughout the 1990s, and still manage to experience a domestic depression? Finally, should we therefore entertain the prospect of a “competitive recession”?

There are three broad reasons put forward to explain the persistent Japanese slump despite huge government spending, a collapsed currency and low interest rates. The first focuses on the banks. It is argued that because the banks lent hand over fist to finance property and share transactions, they were left with huge bad loans and are practically bankrupt. They are now in no position to lend new cash. Thus the supply of credit is a problem.

The second contention is the once bitten, twice shy argument. People were so badly burned that they will not spend again and they will continue to save no matter what the interest rate. Incidentally, Japanese real interest rates have been negative for much of the past five years. Thus, the demand for credit is a problem.

The third explanation takes the two above and adds demography. Burnt by the 1990s boom/bust experience, the Japanese are getting older and are saving for retirement. As there are insufficient investment opportunities in Japan, this cash is not invested at home but abroad and this explains the current account surplus. This may be the most plausible explanation for the persistence of the depression but it doesn’t explain why it happened in the world’s most competitive economy.

In Japan, two economies operated side by side. Alongside the high-productivity, high-tech exporting sector was a slow, corrupt, uncompetitive domestic services economy. Unfortunately, this latter sector and its employees believed the miracle story and spent as if they were all working for Sony, Hitachi or Mitsubishi. The banks lent huge amounts to the property market and commercial developers were seen as the best bet.

Things started to go pear-shaped with the mini US recession of the Bush years. Sadly, when the bubble finally burst, people in the low-productivity services sector who had seen their wages rise steadily, realised too late that their houses were built of sand. When hard times hit, the domestic economy was neither solvent nor sufficiently innovative to recover. Japan’s exporting sector continued to be a world beater, notching up a trade surplus of $125 billion this year alone. But the tired, indebted, domestic economy — which employs the vast majority of people — has never recovered and remains insecure and depressed.

Therefore, economic statistics on things such as export growth are “virtual” in that they are of no relevance whatsoever to the life of a man facing 20 years of negative equity. What scares me is that the Japanese model of two economies fits Ireland. This week I visited IBM, one of the world’s leading high-tech companies and one of the biggest employers in North West Dublin. Getting to IBM’s futuristic campus by 9am demanded an arduous journey across Dublin at peak traffic hours.

The journey was like passing through one world to arrive at another. My taxi, which arrived one hour late and took over an hour and a half to get to Mulhuddart, sneaked its way through a rainy city reminiscent of Caracas with little public transport and full of traffic, fumes, beggars and stressed drivers fit to be tied. I arrived in a tranquil, clean, modern world — more Southern Ontario than South America. Here the productivity miracle can be seen in operation where educated workers are doing their stuff.

However, in the evening these workers return, as if through some invisible border, to the overpriced, uncompetitive, rip-off economy where people are borrowing like there’s no tomorrow, the infrastructure is creaking and industrial unrest is the order of the day.

Today’s Ireland looks, smells and feels like Japan in the late 1980s Japan. Every time I see the excellent “Take five @ �200,000″ piece in the Irish Times property section, in which a two up, two down in Stoneybatter costs as much as a chateau in Provence, I think of Tokyo’s imperial palace and Canada around 1990.

  1. Robert Browne

    David if you keep saying the same thing eventually you will be proven right. People who ignored your advice have made hundreds of thousands from property transactions. Those who lived in tents waiting for the property crash may now discover that just when prices are cheap, finance is almost impossible to obtain! Of course those who listened to you can always wait for the next boom in property prices and the end of the credit squeeze of course they may be considerably older by then. David where would we be without the pessimists like yourself who disguise themselves as optimists? Yes! of course I’m referring to your good self! George Lee whines about oil running out while he drives a gas guzzling mercedes. You gloat about being finally proved Right (after 10 years). You both sound like little boys with very small penises and huge inferiority complexes. Have you ever created a single job for anyone in this country probably not! However, you both contribute handsomely to the doom and gloom that leads all the way to the nearest dole queue. Grow up and stop living off the capital in this economy that has been created by optimistic entrepreneurs willing to take risks. The only risks that you guys are willing to take are with your mouths and talk is cheap. Most of the stuff you come out with is trite arrant nonsense can you not find a better and more honest way to make your bucks?

  2. David Mc Williams

    Now now Robert, what’s all this stuff about? You sound a bit sore. I have always claimed that our property binge had nothing to do with housing but everything to do with finance. We had a binge not a boom and the problem rests with silly lending to one asset. I have traded property (and other assets) all through the boom having bought first in 1992 and in fact, sold my last property in August (in London). I’ve bought and sold at least a dozen times.

    Just because you understand that the “fundamentals” arguement is bogus spin, flogged by salesmen, doesn’t mean you should not trade the asset and make money during a craze. The important thing is to realise that its mania not economics driving the process.

    You say “doom and gloom” I say honest, objective commentary – unencumbered by the vested interests that have high-jacked the financial debate in the country. And as for entrepreneurial risk taking, you Robert have no idea about how I make my living other than what you decide to see in public. You have no idea how many people I’ve employed and still do, so if I were you, I’d shut up, stop whinging and figure a way to trade out of the downturn.

    Best of luck in 08,


  3. Good comeback although I admire your restraint. The amount of personalised abuse that is flung at yourself and some other similar commentators is quite extraordinary, we’re implored to consider the “fundamentals” while dismissing critics as “doom-mongers” and as Robert puts it “You both sound like little boys with very small penises and huge inferiority complexes.”

    Maybe it’s time now that the national mood has changed to start calling some people for what they are – hype peddlers, gombeen men and in some cases downright conmen.

  4. Garry

    The article was written in 2000 and the property bubble kept inflating for 6 years afterwards. Interesting the article didnt merit a comment in 2000 and now in 2008….come on surely an 8 year old article cant topple the whole house of cards…. is it really that fragile?

    I smell fear…

    Rather than shooting the messenger, why not look back and see if we can pick more deserving targets. My money is on the boys who are still in power…. a small property tax on a persons second or third home would have killed off the worst of the speculation. (Up to recently, it was common to hear about builders holding on to 10 or 20 apartments, or speculators buying up whole blocks). Instead of taking some brave decisions, they extended section 23/50 tax reliefs. Now they couldn’t have predicted the interest rates after 911 but they did absolutely nothing to discourage property speculation….

  5. AndrewGMooney

    Robert, if I keep saying the Earth is flat will I eventually be proved right? No. Only evidential material works. David has some pretty conclusive evidence to hand now. And there’s more to come. Much more. Sorry to rain on your parade.

    Some people have indeed made money from property. I did. And then sold up. Now I live in a modest family house in low-crime exurbia U.K. I currently owe £1.26 on my mortgage, a nominal amount so that I keep the ‘draw down/credit facility’ open just in case:

    I need funds for my children’s education, emergency medical care, or business start up capital. NOTHING else. No cars, conservatories, kitchens, holidays. Face-lifts, tummy tucks, etc.

    Nothing will ever be purchased again unless it’s with after tax income from earnings, savings or investments. So, I’m immune to interest rate turbulence. In fact, I’m safe from anything other than a truly cataclysmic economic event because I live so modestly.

    Yes, I’m a traditional economists nightmare. If everyone lived like me the world would be a sadder place for entrepreneurs and producers of consumer products. But it might be a more sustainable and sane place. I’m a balls-deep Burnsian. There. Out of the closet! We’re a growing cult. Check out this article entitled: ‘Can Anything Bring Down the Monthly Payment Consumer? Part VII (Final)’. [press page down to get to article after comments]

    Money quote:

    “The Burnsian consumer gets more joy and gratification from not buying each and every dispensable product she doesn’t purchase than the folkloric consumer of economists’ models gets from, in the words of George Carlin, “spending money he doesn’t have on crap he doesn’t need.” The question is how many consumers go Burnsian on us next year”


    I learnt my lesson in the recession of 1988 to 1992, when interest rates doubled in the U.K. I was suddenly massively overstretched on two properties, survived by the seat of my pants, and had a negative equity hangover for years to go with the redundancies. I was young, foolish and greedy. Now I’m older, wiser and very cautious with my modest resources.

    Other people I know in the U.K, U.S and Eire are becoming extremely anxious about their situations, and, by recent calls, txts,emails, I gather they no longer regard me as quite so ’eccentric’. The paper ‘profits’ they sit on are irrelevant to their monthly cash-flow situation, whether it’s the many-times remortgaged for retail therapy family home, the holiday home, or the multiple condos bought off plan in Orlando.

    Housing is illiquid, you can’t just press a button and be rid of it. It requires maintenance, repair, insurance. And if you’re not living in it and have a mortgage: Responsible tenants at market rates. As more and more ‘motivated sellers’ fail to manage their credit/debts more of these properties will flood the market, driving down rents, increasing the pain of the over-stretched rentier class.

    Property is only worth what a buyer will pay for it when you have to sell (rent). That’s how markets work unless Government intervenes on behalf of special pleading vested interests groups, which I‘m sure will happen in Eire because the situation is so serious. The rest is hype, froth and nonsense.

    If you can’t service your debts because of interest rates, the whole thing can unravel. Quickly. For individuals. Businesses. And interlinked regional/national economies.
    Entrepreneurs and job creators rightly bask in the sunshine of praise for their successes, but have a lower-profile when a downturn ensues and the talented babies get thrown with the bathwater in the ‘cut-the-head-count-cost’ panics.

    Do they then soberly reflect on personal, business & macro economic policies and decisions? Or shoot the messenger? I trust David is wearing his Kevlar T-Shirt and boxer shorts these days.

    In a severe contraction the ‘optimism’ of entrepreneurs is meaningless as there is an implosion of consumer and business demand, which like in Japan, can be immune to traditional government stimulus. The bigger the binge, the more painful the hangover. Isn’t that what David’s been ’gnashing and wailing his teeth in the wilderness’ about? In my view, he’s backed a winner in The Long Game. You don’t ’Get Rich Quick’: Not as an individual, unless you win the lottery. And not as a nation, unless you win another lottery, like ’our friends’ in (Saudi) Arabia. Which lottery did Eire win? I just don’t understand at the moment. Someone enlighten me.

    I’m intrigued as to why you’ve picked a comment from 2000 to reply to in 2008! The fact that David smelt a rat long before the pack doesn’t mean he’s been wailing ‘The Ides of March!’ for no reason. It might mean he’s actually capable of independent thought. Like me.

    Here’s two provocations for you, off the top of my egg-head:

    Name me 5 world class Irish company brands that mysteriously escaped inclusion in the following list of The World Top 100:


    And, as further salt into that scratch, digest this [albeit it from the dodgy-wisdom-of-crowds-Wikipedia!]:

    “One of the major challenges facing Ireland is the successful promotion of indigenous industry. Although Ireland boasts a few large international companies, such as AIB, CRH, Kerry Group, Smurfit Kappa Elán and Ryanair, there are few companies with over one billion euros in annual revenue.”

    How did Ireland become World-Class Rich without World-Class Indigenous Industry? Is it an Act of God? Is it ‘real’ and sustainable, or can it go into reverse thrust just as easily? Selling other companies software is fine, but if you don’t own it, you’re just a White Van Man of a country, surely?

    I enjoy David’s musings as it’s light but serious reading and he coins a decent pithy pop phrase. It’s not a case of ‘glass half-empty’ or ‘glass half-full’: It’s surely a case of what is that substance in the glass? Is it nectar or poison. Sustainable wealth to reverse the centuries of Irish stagnation and decline which forced my parents to emigrate?

    Or is it just a temporary off-shore toxic Yankee whorehouse cocktail; and The Fifth Fleet will move on to another port with their software companies and logistic hubs just as soon as ‘the language issue’ is rectified in Portugal/South Africa/ India/Indonesia, take your pick. There’s plenty of reserves left in the undeveloped human capital fields. If not in oil.

    As an aside: I agree there is no oil/gas/energy crisis. There’s a energy conservation challenge. Stop heating the streets with your sash windows! Insulate every roof by government decree. Dump the S.U.V, double the m.p.g and the petrol lasts twice as long. Not exactly rocket science for a primate that’s walked on the surface of the moon. Is it?

    Second provocation: I’m visiting Ireland in April. How should I travel?
    Option 1: Fly to the congenial and relaxing cocoon of the futuristic wonder of The New Dublin Airport, which easily outclasses Schipol?
    Option 2: Drive through South Wales, read James Joyce on the ferry to Cork, then drive to Laois and Kildare on the amazing new motorway built from E.U structural funds?

    As a ‘second-generation-bona-fide-‘plastic-paddy‘-anglo-irish-man’ I’ve watched my parent’s country emerge from it’s chrysalis with surprise, then incredulity, and finally with alarm. David pulls together a number of issues that I’ve yet to see deconstructed and dissected with anything other than pique and anger. Certainly not by recourse to objective economic and financial data.

    PS: All little boys have little penises and inferiority complexes! Until they grow into men with man sized wedding tackle. Well, some of them grow into men. Others just throw their rattle out of the pram at any age when they have to deal with frustration, disappointment, loss of ‘paper profits’ and negative equity…

    Kind regards

    AndrewGMooney. b:11.09.1960. Birmingham. Eng-Eire-Land.

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