Land: The $180 Trillion Asset That Runs the World | Mike Bird, The Economist

Ryan:
[0:02] Okay, so we've talked about many different assets on Bankless,

Ryan:
[0:05] but I don't think we've given one asset in particular it's due. Today, we're going to be talking about $180 trillion asset. It's the asset called land. We have Mike Bird here to talk about it. He's an editor at The Economist. He's the host of Money Talks, a fantastic podcast. He's also the author of the subject of today's episode of a book called The Land Trap, a history of the world's oldest asset. Mike, welcome to Bankless.

Mike:
[0:32] Thank you very much. Happy to be here.

Ryan:
[0:34] All right, cool. So to write your book, I think you had to study land. I enjoyed this book and in kind of the history of land. And you also had to study real estate, both in America and across the world, across many different countries.

Ryan:
[0:46] So I figured you'd be the perfect person to ask this question. Why in the world has it become so much harder for people starting out to afford at home?

Mike:
[0:56] It's a great question. And I always think that if you were to go back like 150 years or any amount of time, really, I think this is one of the questions that people would struggle to understand why it hasn't been fixed, basically. Why there has been so little progress, especially if you go back, you know, 50, 60 years, it seems a lot more difficult now that it was then.

Mike:
[1:23] So I get this a bit in the book, and I think the basics of it are that the economic geography of the world changed quite a lot in the 20th century. So let's talk about it from the perspective of the middle of the 20th century in the US. Let's start there. You had a bunch of relatively productive, successful cities. You had cities on the West Coast, the East Coast, the industrial Midwest, where land prices were all not that different from one another in the grand scheme of things. House prices, certainly not. House prices in Detroit, New York, Cleveland, LA, San Francisco, all somewhere in the sort of $8,000 to $15,000 region in the mid-1950s, right? So not a huge dispersion between them. That is largely because these cities were all able to expand pretty aggressively. In the middle of the 20th century, transport technology changed a lot. Streetcars, trams, light rail, the car obviously transformed cities around the world, but particularly in America, and basically made it so that the constraint on land was massively eased for a period of time. What changed later in the 20th century is the combination of.

Mike:
[2:48] Deindustrialization in the heavy industry cities, which was a sort of massive negative shock to land prices in those places, combined with the rise of information economies, digital focused knowledge worker hubs, thinking especially New York, LA, San Francisco, places like that, where land prices just seem to go up and up and up and up. So you ended up with this enormous dispersion. And the answer to the question, I think, to some degree, is... It's not actually that difficult to buy a house if you don't care where you're living. Most people do care where they're living. They want to live in productive places, near well remunerated work, near people they're interested in hanging out with. And that has sort of squeezed the locations down to a much smaller group of places than was the case, say, 70 years ago. I think that's the largest part of it. those places have systematically failed to build anything like the number of units that would be required for the demand that people have to live there, even just people in the United States, let alone people coming to the US like myself. Those are, I think, the main things, that transformation of economic geography, and then the total failure to expand those places, either upwards, outwards, in any direction. That is the real difficulty.

Ryan:
[4:11] Yeah. So there's a bit of a demand issue. And then I guess you're also pointing out a supply issue as well. And I think you call them in your book, these super cities, these are the locations

Ryan:
[4:21] that everybody really wants to live in. So if the US in particular maybe is, well, many countries are, but if we're in a housing crisis of sorts now, what do you think the downstream effects of this actually are? Are you convinced by the ideas in papers like The Housing Theory of Everything, which is just like, a lot of bad things are downstream of expensive land and housing costs. So you get like low birth rates, you get obesity and health issues. All of this is caused by unaffordable homes, even some of the social unrest and radicalization that we're seeing show up in society. Maybe all of this is downstream of housing costs as well. Do you buy that argument?

Mike:
[5:08] I do buy that argument. I should say that Sam and Ben and John, the authors of the housing theory of everything are good friends of mine.

Mike:
[5:15] I think there's a lot to that argument. I also think that you can see some trends developing in the US now, although I will say, I think there's a lot of places in the world, and we can talk about that if you like, that are worse affected by these sort of dynamics than the US. But you can see in the most land-constrained areas in the US, I mean, we've got the New York election. There's an obvious dynamic in the city of sort of haves and have-nots that's based largely on real estate ownership and whether you're finding yourself renting in a very expensive part of the country or not, or whether you're a beneficiary of that sort of extraordinary shortage of residential housing. So you see that sort of split there. I think there's also some other spillovers. Those ones are all quite serious. One of the things I wanted to look at in the book is the link between land and real estate and the financial system, because people like Ben and Sam and John, they're better versed in the land use side of things. I'd like to think I know a bit. Those guys are the experts. I think land as a financial asset is absolutely fascinating as well.

Mike:
[6:22] So land is collateral against credit, land and real estate. And where real estate is most expensive, it's mostly because of the value of land underneath it. The tiny house in LA doesn't cost millions of dollars because it's better built than anywhere else. You know, there might be some constraints on building, but it's really because of the value of the land.

Mike:
[6:44] That allows the people who own property in those places a sort of very, very large collateral against credit. They want to borrow. They want to set up a business in particular. It's the way a huge proportion of small businesses in the.

Mike:
[6:58] US and the

Mike:
[6:59] Rest of the world are financed. They can do that. People who live in places where the land is much less valuable are much less able to do so. So it creates these really interesting sort of disparities through the credit and banking system as well. So I think it's extraordinarily important, the housing shortage in the US. It has all these spillover effects that Ben and John and Sam talk about. I think it also has these, yeah, interesting financial effects as well.

Ryan:
[7:27] On the financial side, I think we saw some of those financial effects and where it could go wrong in the US, of course, in 2008.

Ryan:
[7:34] It is fascinating how financialized land and property on top of that land has become. And this wasn't always the case. Maybe we'll get into the history of America a little bit later, but it seems like the U.S. Was really pioneers with respect to turning land into money. And I guess let's stay on today, though. To what extent is land money today? I think we sort of take for granted that it's very easy to get credit based on collateralized loan obligations, get mortgages, get access to it. The extent that land is really tied into our banking system, the extent that land is actually part of the US dollar system and apparatus. I mean, land is part of M2. Maybe dig into that a little bit. To what extent is land money? And you mentioned the financialization of land. How does that affect our money supply in general? And how is it really tied into the US dollar system?

Mike:
[8:39] It's a great question. And I suppose where I'd start is that obviously when it comes to sort of base money created by the central bank, land is less important, right? You know, if the central bank wants to increase base money, if it wants to create more reserves, or if it wants to, you know, increase the amount of cash in circulation,

Mike:
[8:58] it can do that. And that's not to do with land. But when you think about broad money, which is overwhelmingly issued by banks in the form of loans, becomes deposits somewhere or other in the system, land starts to become incredibly important. You saw this process during the 20th century of, there's a group of economists that wrote about it and they call it the great mortgaging. Basically banks in the US, but actually even more so in some other parts of the world, became really these mortgage generation machines having previously fulfilled a role that was much more in the world of secured and unsecured business lending. So as banks became more and more mortgage-oriented, you saw, funnily enough, more and more of their lending secured against homes and against land where homes are the most expensive.

Mike:
[9:45] That's where I think the role of land comes in in terms of the creation of money and particularly in terms of the credit cycle. So we've seen this time and time again where land prices and bank lending are sort of really tightly correlated with one another. And if you have a mortgage-oriented banking system, that's likely to remain the case. Essentially, banks are lending money. They're lending it in the form of mortgages. They're securing it against land. Land prices, maybe through high demand, helped by the banking system, those go up. It gives the banks more freedom to lend. Essentially, the collateral constraint is being reduced. You've seen some really extreme examples of this through history. Japan in the 1980s is a great example where land prices boom, bank lending booms, land prices boom in response, and it goes all the way up and up and up in this sort of spiral until you reach a point at which it's deliberately curtailed and things start to collapse. Version of this, obviously, in the run-up to the global financial crisis, especially in the US in terms of bank lending. So there is this sort of really, really close financial relationship with land. You mentioned at the beginning of the show, it's maybe one that you haven't tackled directly before.

Mike:
[10:56] I'm fascinated by exactly that sort of thing. This comes up quite a lot when I speak to people about it. They realize that it's an asset worth, you know, hundreds of trillions of dollars. They realize that it's a really important part of non-financial real wealth in the world, but it's not really considered an asset class that's talked about day in, day out, right? In a way that, you know, I write about the equity and bond markets every week. I write about the banking system every week, but I write about this connection with land and real estate much less often.

Mike:
[11:27] So yeah, I think it is enormously important to the health of the US financial system. And again, just to sort of lay it out, probably more so in the rest of the world too, in the sense that the US does have really, really excellent capital markets and a really, really excellent system of financing for growth companies, right? Small companies in the US, there's a huge venture capital market, far bigger than in most countries. So at least those really innovative companies can engage in lending, got a big private equity market for more mature companies. You've got relatively, I'd say, skilled and professional banks that can secure loans against things like, you know, receivables and, you know, future earnings. That can sometimes go wrong, as we've seen recently. But you do have a relatively advanced and I would say forward thinking financial system. In lots of other parts of the world, banks are far more dominant.

Mike:
[12:29] They make up a far bigger proportion of the total financing in the economy. And you see an even tighter relationship between the health of the financial system and what's happening in real estate and land. Ultimately, bankers, there's a lot of academic literature about there about lazy bankers, which is one way of putting it. It's much easier for them to secure loans against collateral in asset classes, they understand. It's so, so much easier to do that than to dig in and say, I think this business is fundamentally healthy and I think its future earnings are worth X, Y, Z, and I'm confident in lending this much money at this interest rate. It's so, so much easier to do this with real estate and land. And that's what people tend to do.

Ryan:
[13:08] Which is why land has become the chief source of collateral for the banking system. And we think of the U.S. dollar being sort of, you know, the U.S.'s maybe its largest export.

Ryan:
[13:18] It's certainly right now the world's reserve currency. You think about to what extent a large portion of that supply is actually backed by collateralized land. And we don't talk about it, to your point, Mike. I want to get back to this idea. So the opening question was, you know, why is it so much harder for someone starting out to afford a home? And you made this interesting comment. You said, I'm kind of surprised that there hasn't been a reaction to this. And we have maybe seen some radicalization in certain areas, but there hasn't been a direct tackling of land reform. You know, but part of, I think, some of the analogs in your book, you talk about the early 1900s, maybe in some ways that looks similar from a wealth inequality perspective to 2025, right? Similar levels of income concentration going to, you know, 1%, something like 20% of all income goes to 1% people in the US. Well, this is similar to the Gilded Age in the early 1900s. And so out of the Gilded Age and during that time, there was a guy named Henry

Ryan:
[14:27] George who went around preaching land reform and coming up with a movement called Georgism. Are you surprised we haven't seen the equivalent of a Henry George today preaching these things? Why haven't we seen this?

Mike:
[14:43] So I'm a little bit surprised in some ways, and then in other ways that I can go into less so.

Mike:
[14:50] So Henry George, 1879, writes a book called Progress and Poverty. It is not a well-known book, I would say, anymore. At the time, a few years after publication, as it sort of built up ahead of steam, it became one of the most influential books, not just in US politics, but in the world. You know, one of the very few books you could say directly inspired political movements, both sides of the Atlantic and further into other parts of the world as well. Really, Henry George was the primary mover in a land-oriented political movement that was extremely active at the end of the 19th century and the beginning of the 20th century. Maybe the sort of dominant strain, in fact, I would say the dominant strain of liberal and progressive, small L liberal, you know, the type in the liberal party in the UK, among Democrats in the US as well. It was this absolutely enormous movement. And the story that Henry George told was essentially that Americans and people elsewhere lived in this moment of astounding technological progress. If you lived in the US at the end of the 19th century, you were going through a period of time where railways were being laid out across the country. You were seeing the beginnings of the development of auto travel. You were seeing electric lighting. You were seeing the beginnings of the telephone system, the telegram system.

Ryan:
[16:18] It's just like all of the fruit of the Industrial Revolution.

Mike:
[16:20] Absolutely. So that period in the late 19th century when sort of these innovative ideas were turned into mass consumption products and enabled everything, really the modern world, as I see it as being built at this period, physically being put together.

Mike:
[16:37] And Henry George sees all this and says,

Mike:
[16:39] Well, this is great, but have you also noticed what's going on in America's cities and to some extent in the countryside? And you were seeing this fairly extensive inequality, which had built up through the 19th century. You end the 17th century in the US, not long after the US revolution, even before the American revolution. America is this astoundingly equal place by any comparison anywhere else in the world. doesn't have a very clear class system. Land ownership is very common. Wages are extremely high. And this changes through the 19th century and equality gets a lot more obvious. Henry George says this is all because of land monopolies. And it's all because basically the American frontier by this point is effectively closed. America's cities are set where they are. And the people who own the land are able to mop up all the gains of all this brilliant productive technology. If someone invents something, if someone has a wonderful business idea and it increases, they didn't talk about GDP then, but if it increases GDP by 50%, it doesn't matter, he said, because the landlords are just going to hoover that all up from all of you, right? It may be anyone who makes these steps in progress, but it will eventually be the landowner that benefits.

Mike:
[17:54] And Henry George is a fascinating guy because he is not, to be clear, the first person to talk about this stuff. The classical economists, Adam Smith, J.S. Mill, a bunch of other guys had a huge component of their thinking that came from the same place and they thought that you'd have a land value tax, which is what Henry George proposed.

Mike:
[18:14] Henry George did it with the vibes of like a lay preacher. He used this fiery religious language. He was a populist, really. Whatever you think of the ideas, he was an exciting, interesting figure. And he captured public attention in the way that very few people had managed to do in America before, and certainly not on land-related issues. His proposal was a 100% land value tax. So essentially, all of the rental income that you could get through owning land and any rise in the value of it would be taxed away.

Ryan:
[18:49] I think maybe to see his criticism of what was going on at the time, you mentioned monopolies. Actually, the popular game Monopoly, which I'm sure Bankless listeners have probably played, had experiences with maybe some family squabbles around the monopoly board table. That actually, that game, the genesis of that game actually comes from the critique of Georgism, does it not? What's the story of the board game Monopoly?

Mike:
[19:13] It does indeed. It does indeed. So Monopoly, the original name was the landlord's game. And I think it's a credit to just how important Georgism was at the time and just how far things have gone in terms of this being forgotten, that nobody knows that this is true anymore. So it's this fascinating thing. And basically, yeah, you can see through the dynamics of the game, just how Georges believe that things worked, basically. Yeah, Lizzie Maggie, I believe, 1903. I might be incorrect on that by a few years, but developed the Landlord's Game. And yeah, it's the precursor of Monopoly.

Ryan:
[20:01] And the basic idea for everybody who's played Monopoly, right, is you roll the dice and if you're first to the property and you have the cash and you buy it, you become a landlord. And the objective of every player in Monopoly is to acquire as many properties as possible to build houses and hotels on that property in order to charge all of the other players rent. And what ends up happening is somebody ends up with all of the money in the game, right? And it usually doesn't take that long. And at some point, probably halfway through the game, when it's clear there's a dominant player, at least all the games I've ever played, Mike, have gone in this direction. All the other players just get sick and tired of the game. They start to hate the game.

Mike:
[20:43] It becomes a lot less fun.

Ryan:
[20:45] And then it becomes almost like a power trip for the person who is kind of winning. Then you like to finish out the game. I don't know how many successful games of Monopoly I've actually finished with people. But as I was a kid, many of those games ended in tears. I can't remember a lot of smiles at the end of the game. And that's basically what Georgia's critique about land in the Gilded Age at that time in America was. Is basically these landlords are getting there first and they get these durable properties. They're not letting it go. They're charging everyone else rent and the entire economy contracts and freezes and pools into the hands of the few wealthy elite.

Mike:
[21:27] Yeah, that is exactly it. And I think the dynamics of the game, the fact that there is effectively one winner, right? The fact that the gains mop up very, very rapidly, you know, that as you're playing it is exactly the sort of model. so, To the question of why don't we see this now, or are we going to see this now? I think you have to get.

Ryan:
[21:51] Into a little bit

Mike:
[21:51] Of what happened in the rest of the 20th century, right? So as you get towards the 1920s, 1930s, and beyond that, because the sort of transformation in American politics and in politics in most of the developed world really killed Georgism surprisingly rapidly.

Mike:
[22:12] Two things happen, I would say, or two major things, and it becomes this sort of pincer movement for Georgism. The first is that the organized left, which George is really a part of the organized left in the 1880s, the 1890s. The organized left doesn't really look like what we'd think it does now. It's a lot more disparate. It's still sort of coming into its own. But the important thing is that, you know, the sort of state socialism that is the intellectual root of a lot of left wing movements today doesn't exist yet. Right. So there is no model to work from. You'd ask an American leftist in 1890 who Karl Marx was. They may have had a difficult time remembering which of these German socialists it might have been. that changes with the Russian revolution, right? You have an organized Bolshevik government with a certain ideology that changes the politics. And you see Georgists, even before this point, people who get into politics, hearing about Henry George's ideas, they think about it and they think, okay, well, land is maybe important, but actually I'm going to apply this to everything as well. I don't like that the guy who owns the light bulb company is a millionaire either, right? I don't care that he's not a landlord. I don't like that either. I don't like the wealth disparity.

Mike:
[23:31] And they decide, you know, Henry George was great, but you know, I'm actually going to apply this to all capital, all wealth. So you get a lot of that. Then on the right, you have this big, big change in thinking.

Mike:
[23:43] Which in a lot of the world, it comes around at roughly the time of the mass franchise coming into existence, universal right to vote. Certainly you see this in the UK, which is that parties on the right, conservatives, traditionalists realize the way we did things in the 19th century, the game is up now.

Mike:
[24:03] Right? The world that

Mike:
[24:04] We lived in can't continue. And one of the best ways, the best ways to promote a sort of more conservative, traditional rights and property oriented society is to promote home ownership very aggressively, right? We can't go back to the days when only guys who owned land had the vote. So what we need to make sure is that most of the voters have some land, right? So you see these huge home ownership promotion schemes coming in pretty much everywhere in the world. Huge financial apparatus to lend against land and real estate emerges.

Mike:
[24:37] Huge subsidies in the tax system, tax breaks, all sorts of things, grants. The entire apparatus of home ownership assistance in the US as it exists now is coming into being at this time. What that does to a movement like Georgism is you're no longer talking about a landed elite. You're talking about a landed majority. And it becomes very difficult to run a populist movement when your enemy is sort of 65% of the population.

Mike:
[25:07] Who no longer feel like they're being really hard done by landlords because they own their own properties. There's no enormous wealth disparities in real estate by the middle of the 20th century, as we discussed. And it really puts Georgism to death. And that, I think, is the difficulty now, which is that we still have the sort of not quite so satisfying residue of that system. Home and land ownership is much more widespread now than it was at the end of the 19th century. So it does make movements like Henry George's substantially more difficult. I think not impossible, especially in the places where home ownership is actually quite low, like New York. But it does add an element of difficulty and it really accelerated the decline of Georgism, which is very, very rapid through the early 20th century.

Ryan:
[25:58] Then do you anticipate that in order to sort of fix this problem in the U.S., we might see a resurgence of maybe it's coming from the right or maybe it's coming from a more moderate left of increased democratization of home ownership? We haven't quite seen a movement like that in the U.S., though maybe it's bubbling under the surface. I think the tough thing now,

Mike:
[26:18] And it's one of these problems I deal with a lot in the book, which is just I don't know how you get there from where we are now. It's not that I would disagree even necessarily that it was a good idea. You have a system where governments around the world have two aims that are really in conflict with one another. The first is there is an established class of homeowners.

Mike:
[26:42] It's a relatively large proportion of the population and those homes have gone up in value a lot. Now, those people do not want the value of their homes to go down. They certainly do not. And to some extent, that's reasonable enough, right? They've been told that this is a store of value. Nobody's going to win an election on the back of, I'm going to rinse these people, right? They are going to get done dirty and we're going to make it really easy for everyone else to own a home. On the flip side, there's the goal of promoting home ownership, right? Nobody wants an army of disgruntled millennials and Zoomers out there, you know, griping and becoming politically radical because they can't own homes. I think there's very few places in the world that have worked out any serious way of matching these goals to one another. And it makes that sort of change extraordinarily difficult. I think there probably will come a time where people have to address this in some way or another. In places like New York, that's especially true when it comes to things like funding public infrastructure, right which is one of the reasons that Henry George wanted a land value tax in the first place.

Mike:
[27:51] You build a subway line or a new station or something in New York, it costs billions of dollars, insane inflated construction costs. It's extraordinarily expensive. But the land value gain that goes to the people who own the land nearby is more than enough to pay for it. They're the primary beneficiaries of something like that being open. And it's always been this case in productive, dense cities. Landowners get this huge windfall from any infrastructure being built, and a useful infrastructure. But often there's no mechanism of sort of using that land windfall to pay for some of the projects. I think people are going to have to think about this a lot more in the future to try and address some of these things, even if you can't go slightly further and put more aggressive taxes on land. In general, there has to be some way of using that windfall specifically for

Mike:
[28:42] infrastructure spending.

Ryan:
[28:43] There is something unique about land, the asset, and you get to much of that in the book, maybe now we should start, go back, rewind a little bit, go back to first principles of land, the asset. I mentioned a little earlier, this is, according to McKinsey, $180 trillion asset. So 35% of the world's $520 trillion in real wealth is land. So if you're looking at equities, that's about 2x all stock markets in every country combined. That's how big land is. Let's talk about land and why it's different than other assets. So why is land different? I think you have a few attributes that you point out. What are these attributes?

Mike:
[29:26] Sure. So I think the basic thing is that there are three. Or I think the simplest way of putting this is that there are three. When we think about assets and goods in general, there's a normal way of producing more of them. If a manufacturer finds out that some widget is being sold for a climbing amount and it's made by a competitor, a manufacturer will say, well, I'm going to make that now. And it's true of assets as well, right? If the equity market is doing really well, you see companies IPO-ing, they supply more equity. if debt markets are humming and interest rates are low, companies will lend. Basically, there's more supply when there's more demand. This is frustrated when it comes to land because it's fixed both in place and in supply. So you basically, there are a few cases where you can create more land. There's a few places that have done this. Netherlands have done it very well. Government of Singapore has done it very well. Parts of New York and parts of Tokyo Bay are reclaimed. But basically, we're dealing with right now the same amount of land that would have been familiar to almost anyone 200 years ago before the emergence of modern economic growth. So this is the principle of scarcity.

Ryan:
[30:45] I think. And this is a principle that our listeners are very familiar with coming from crypto, of course, because, you know, Bitcoin famously 21 million fixed cap scarcity. What's interesting as you say that is even Bitcoin right now inflates at about 0.85% every year, at least at this point in time. Gold is about 1.5% per year because you can always dig more gold up. And so that's kind of issuance. Land is pretty much close to zero. There's 0% new issuance of land per year. I guess, you know, And there's some tiny pockets where we are expanding land, but it is actually the scarcest asset on the planet, is it not?

Mike:
[31:25] Yeah. I mean, when you think about it that way, it's crazy, right? You think of the value of gold, for example, but gold mining adds way more gold than any land reclamation has ever done. Yes. Which is astonishing. You know, it's true of diamonds. It's true of anything where there's a scarcity element to it. So that's the scarcity in terms of the total amount. The second thing is that you can't move it, right? Basically, one plot of land and another don't make good substitutes for each other. And I would encourage anyone to go and, you know, live in the middle of North Dakota, where you will find ample land and be able to purchase it very cheaply. You will find very quickly that you don't want to live there because there's no one else around and no jobs to be had and nothing to be done. You can't move that land from North Dakota to New York and sort of staple it on, right? So fixed in supply, fixed in place. Those are two of the big ones. The third thing, which I think is the source of a lot of my interest in land and the financial system, and it's the thing that I think people miss most often, is that basically all assets and all things that are valuable full stop depreciate or decay in some way. Now, this isn't true of crypto, and it isn't true of gold. It isn't true of those really scarce, long-lasting assets. But it's true of almost everything else, right? You have a great idea, and it's something you can monetize for a business.

Mike:
[32:52] Assume it as someone else has a better one. Your idea drops in value very, very rapidly.

Mike:
[32:57] Even really long-lived physical things, you know, houses eventually need to be rebuilt. They fall apart. This is not true of land.

Mike:
[33:06] The piece of land that you inherit from someone and it's passed through your family from 400 years, the stuff you put on top of it will change. But the land itself retains value, doesn't depreciate, doesn't decay, which is a big part of what makes it so useful to bankers, to lenders, right? You don't need to think about, well, if it's a 20-year loan, what will this asset be worth at the end? Because I've got to, you know, what if the market changes, et cetera, et cetera. You have to do that so much less with land than you would do with a business or really any other asset so that those three fixed where it is in in space and we're not making much more of it fix where it is yeah in in place where it is and we can't really move it around and the third one that it just goes on and on forever right there's no process of dynamism or reallocation or shifting it around. It's very much locked in place. And that is what creates a lot of the negative dynamics as I see them that I talk about in the book.

Ryan:
[34:06] The negative dynamics, even some of the political dynamics around this, which maybe we'll talk about. But as I was comparing this in my mind, so you're right that land is kind of unique on those dimensions. So you have things like gold and cryptocurrency, which may have some level of scarcity behind them. Also durability behind them. Those assets are not immobile though. You can move them and they're quite fungible. Land is not fungible. The other thing that's different between land and something like a gold or maybe a Bitcoin is land still very much is a capital asset. And yet it's not a capital asset in the way other capital assets are capital assets. And my definition of a capital asset is just like

Mike:
[34:47] It produces income or yield.

Ryan:
[34:49] You can grow agriculture on top of it and receive some yield with the land that you have, or you can build a structure on top of land and then charge some rent. So you get some sort of return on investment, some sort of yield, which you wouldn't get with gold, but it's not a capital asset. Stocks are a capital asset because stocks and companies, they do depreciate in value. They are subject to, I guess, competing companies And land is not like that at all. So it truly is a unique asset. I guess, Mike, what makes land valuable in the first place? So maybe first principles again. Why is land somewhere in rural Ohio so much cheaper than Midtown Manhattan?

Mike:
[35:38] Beginning of the book, I go back, I skip back several thousand years, and then I come back to the modern era, at least the last 300 years or so in trying to explain exactly this question. So you could pick any of your ancestors all the way back to the dawn of time, and they will be able to tell you some version of why land is important to them. It's always been important.

Mike:
[36:01] It's just for a very long time, it was important in terms of things that could actually be done on or grown from the land, right? It would be important for the best hunting grounds. It'd be important for the most fertile valley. It would be important because there was an asset, a commodity to be mined out of it. Those are the things that are important. Now, those parts of the economy now are not quite rounding errors, but not a million miles off rounding errors. You know, if U.S. Agriculture disappeared from the national accounts, aside from everyone sort of starving to death fairly quickly, the actual economic output doesn't change that much, right? Yes. It can be crucial and also not very valuable in terms of, you know, the context of a big productive economy. So that changed, but the value of land is still extremely high, right? It's still, as we talked about, a huge proportion of real wealth. And the thing that explains that is urbanization and the development of industry and the agglomeration of people into cities. What gives land its value is precisely those three attributes and the fact that if I live somewhere, nobody else can live there, right? That specific space, we can keep building up, but in a fixed housing supply, especially, or relatively fixed one, nobody else can move in. And the.

Ryan:
[37:25] Other thing about land

Mike:
[37:25] Is that with Bitcoin or gold or equities or anything else, if you don't want to own them, you don't have to. If you don't want to engage in the market in any way, you are not inclined to do it. You don't have to. With land, everyone has to live somewhere. You, by definition, in a land system where everything's mostly privately held, you have to be stood on something. There's no option to opt out. and basically through the.

Mike:
[37:57] That mostly the 19th and 20th centuries,

Mike:
[37:59] You see this huge process all over the world of agglomeration in cities. We talked about it already, but the rise of knowledge work, the superstar cities, the land now is given value by what's happening around it, right? It's given value by, I'm in midtown Manhattan right now. I want to open a coffee shop on the ground floor. It's valuable to open it here and not in North Dakota because there's going to be 20,000 people that walked past it every couple of hours, right? That's the reality of these things. So it sustained its value through the scarcity effect that was beckoned in by urbanization and by agglomeration. So I find it to be fascinating because it really is the only asset that's retained that sort of importance over such a long period of time. You know, gold, for example, still important, but as a percentage of all the real wealth in the world, it's also close to a rounding error, right? It's a very small proportion of the total wealth in the world. Land, much larger, and the sort of handover from primarily agricultural to primarily urban world changed what we value about land, but it didn't disrupt the overall importance of it.

Ryan:
[39:10] In fact, I suppose in that lens, land has become even more important. It used to be valuable based on what was grown on it in agrarian societies. Now it's valuable, you said, based on what happens around it. So it's become a sort of network type of asset, which is fascinating. Another attribute, and maybe I do want to take us back to the dawn of civilization to talk about this, which is land ownership. Of course, land, it seems like, confers or receives part of its value based on property rights that are given by some sort of government apparatus, some sort of societal coordination structure. So take us to the beginnings of land ownership. This is actually a topic we've talked about a little bit on Bankless before. We've had the writer of Sapiens, you've all known Harari on, and he talks about early writing and how early writing was actually birthed from property rights. I think you tell a similar story about early land ownership ledgers. Take us back to Babylon and maybe the dawn of recording land ownership. What did it look like back then? What was the genesis of this?

Mike:
[40:27] Absolutely. So one of the stories in the book, And again, it's not an ancient history book, but I do find this sort of nugget of information very revealing. You go back through a lot of civilizations and look to the oldest written, recorded things that you can find, and you will find among them, in almost every case, the delineations of who owns what, and who owns what in these eras is almost all land, right? That's what it relates to. In ancient Babylon, under one of the Kassite kings in the Bronze Age, there was a guy called Munabitu. It's enjoyable not to think that I'm butchering that phrase because it's a dead language. Nobody can say exactly how it's pronounced.

Ryan:
[41:10] That's right. You're not offending anyone listening.

Mike:
[41:13] In Iran, there was a stone dug up, a huge piece of smooth black stone. And it's called a kuduru, right? It's a public record of this guy, Munabiti's land ownership, and it's... There would have been a centralized version held, caught, to explain to anyone who asked that he owned this piece of land.

Mike:
[41:36] He would have owned his own version of this to show that he owned this land. And we know from the writing on the stone that there was a dispute over the property rights involved, right? Oh, wow. And I find this absolutely fascinating because this is happening thousands of years before most of even the distant history that people are aware of.

Mike:
[41:58] This is an extraordinarily different thing.

Mike:
[42:00] Again, we are talking about the Bronze Age. This is one of the first recorded things. And it's because in this part of history, land is so supremely powerful. It's giving not just the wealth, not just the income, but often power over a local peasantry. You might have some obligations there as well, but this is a long-lasting thing in big parts of Asia and Europe. So that link between status, it's not just wealth, the land ownership and status side of things has really persisted to now as well. Yeah. So it's a extraordinarily distant.

Ryan:
[42:37] Fascinating. Yeah. Anthropological, like a fact, I suppose. And you can see it like weaving its way through history. It's like, it's like land administration property rights is civilization's operating system. You know, it's kind of core. And from a certain vantage point, you can think of a nation state, even at the scale of something like the US or China today. And to what extent is the government's purpose, a nation state's purpose, just simply to record land ownership and to enforce property rights and to secure it from external actors and internal actors who would try to take it away from individuals? To me, that's almost like the core thing that governments do. That is like the chief function that nations are built on top of. Is it not?

Mike:
[43:30] No, I think that's right. And to a large extent, it's a huge tool to prevent violence as well.

Mike:
[43:37] It's a huge

Mike:
[43:38] Tool to prevent chaos and disruption and anarchy because there are legible systems of delineation and clear ownership rules that are required to, you know, run a functioning society. And it's very, very noticeable that, in fact, up until very, very recently, a huge portion of the world did not have cadastral records, right? You would go to large parts of the developing world.

Ryan:
[44:07] Catastral records, is that just basically land ownership records?

Mike:
[44:10] It is. It is indeed. It's basically, imagine the overlap of a mapping system and an ownership record, right? These are some of the most important records a government can have. There have been huge expansions at various points in history. You know, the Domestay book in England in the 11th century is one example of this. Napoleon made a huge effort in the early years of the 19th century to produce ownership records and map systems of France and other parts of Europe. But in most of the world, in most of the developed world, these records often scarcely exist until a few decades ago. It's transformative not just for the system of running the country, but when we're talking about the link between banking and land ownership, you can't borrow against something that you can't prove you own, right? But you will seriously struggle to do that. So the proof of ownership is also extraordinarily important to the sort of the growth of land in the financial system and your ability to access credit.

Ryan:
[45:11] This actually, this fact blew my mind. It came from your book. You said, while a handful of countries have long records of land ownership, you know, hundreds of years, the medium national land record is just 45 years old.

Mike:
[45:24] So in a lot of countries around the world,

Ryan:
[45:27] Land ownership records are somewhat new. Maybe in a place like the U.S., they've been going on for hundreds of years, and that's part of the reason why the U.S.

Ryan:
[45:35] Has a very well-developed, financialized, land-based monetary system and capital markets. But in a lot of places, this is new. I think Hernando de Soto has called this dead capital, like there's pockets of all this dead capital in the world. What does that phrase mean?

Mike:
[45:53] Absolutely. And I find this to be a sort of fascinating insight of Hernando de Soto is also the source of this huge, interesting conflict between development economists, some of whom seriously dispute what I'm going to explain about Hernando de Soto's work. But Hernando de Soto was a Peruvian businessman and economist, and he had a very successful career and moved back to Peru, having lived in mostly in Europe. And he published a book that was basically describing the difficulty of setting up a business in Lima, in the capital of Peru. And it wasn't just that the regulation was extensive, which it was. It was very difficult from that perspective. It wasn't just that there was a limited availability of resources. It was the fact that for most people, they lived an informal economic existence. Locally, if someone had asked you, what land does that guy own? The local people could have told you. And Hernando de Soto uses a great example of this from Bali in Indonesia. Even where there are no land ownership rights, ask the local dogs. The dogs know who owns the land, right? Because they know the edges that they can go up to, right?

Mike:
[47:13] The reason this is dead capital,

Mike:
[47:15] So the ownership right is locally roughly accepted. So you're growing anything you want to on this land. You're running a workshop. You've got the operations of a business. Capital is working in that sense, right? You have a right to the economic activity. What you can't use it for is access to the financial system. Inando de Soto believed that this was a core difference between Western capitalism, which seemed to function relatively well and capitalism in a lot of the developing world where it seemed to constantly run into problems and didn't work very well.

Mike:
[47:50] And this is still a very, very large proportion of the global population, less than when Hernando de Soto was writing, but it's still a very, very large phenomenon in middle-income and lower-income countries. People who, while they may own something sort of de facto, they can't prove it in a court or therefore to a bank. They have no documentation. And it limits the financial role of the asset, which Hernando de Soto believed had been essential to economic development, particularly in the US. Now, these ideas were sort of adopted very, very aggressively by multilateral development institutions, particularly the World Bank, which got very, very excited about them. as the 1980s went on and into the 1990s. There has been a huge dispute as to how effective these things actually are, right? I think everyone agrees that this is a big component of being a developed country. It's not clear to everyone what direction the causality goes in, right? There are some people that think this is a, you know, the whole thing about the relationship between swimming pools, ice cream sales, and the weather. If you didn't know anything about these three things, and you just knew how they moved, you could easily believe to yourself that it's ice cream sales that are driving swimming pool usage.

Mike:
[49:11] So there is a debate over whether that's the case. In this case, whether it's a sort of third component to economic development that's driving both of these trends. But I don't think there is any dispute that to be a rich, peaceful, developed economy, you do need these property rights systems. And that for poor countries, this relates to no asset more than it relates to land. Land is the crucial one. It's by far the most valuable asset in these places that are financially underdeveloped. So yeah, one of the most fascinating things in researching the book was reading up all around this stuff.

Ryan:
[49:49] Yeah, I completely agree. And I think DeSoto is definitely on to something with respect to property rights. There's not an advanced country with an advanced economy that doesn't have a

Ryan:
[50:00] sophisticated property rights system that's fully financialized. I just have a side question as I was kind of reading this. We're very familiar on Bankless with the idea of a gold standard, which is the idea of gold backing some sort of fiat-based government currency, of course. And this was the standard before the 1970s and Is there the idea of a land standard? Has any country actually tried to implement the idea that we can take all of our land in this land-rich nation that we live in, and we can use our land to back the currency? Actually, as I say that, I suppose at some level, the U.S. Is partially doing that with all of the credit creation that we talked about earlier in the episode that's kind of backed by land, but it's not fully doing that. Anyway, has anyone successfully pulled off a land standard where their entire currency is backed by some sort of property rights and land based use as collateral?

Mike:
[50:58] So I love this question, largely because it gets my ability to talk about one of my favorite things in the book. The North American colonies prior to American independence were a fascinating place sort of economically. And they were very, very different to any European country. And the way they operated economically was quite difficult because you had communities of hundreds or a few thousand people with little means of exchange. These places did not have their own money. And the places where money was was minted money is at this point overwhelmingly actual physical money right so you're talking about gold silver you're talking about coins you were seeing the development of sort of iou-based paper money but it was still backed by gold and nobody wanted something that was backed by gold and only redeemable in say london um if they were if they were living on A.

Ryan:
[51:59] Three-month ship trip across

Mike:
[52:02] The ocean. It's a tough journey to go and collect. So you have this constant shortage of money, right, as well as a constant shortage of labor, very high wages for that reason. And people stumbled over this idea over and over and over again in the early years of English colonization in North America. And there were English theorists that wrote about this as well, including one, William Potter, who wrote a treatise in 1650 called The Key of Wealth, where they asked exactly the question that you've just asked. Gold is very valuable. You know what's more valuable than gold? Land, right? Why can't we have a land-backed currency? This becomes particularly acute in the Americas because they've got all this land, this wonderful land, which they're immensely wealthy in, but very little of anything else, right? So a number of people start to think about, how can we create our own currencies backed by the value of land? And you see all of these efforts to create both public and private land banking institutions. The idea is local landowners borrow money. They go to borrow money from a bank that you set up. You issue them with script, with your own currency, an entirely new thing, right? And your collateral against the value of the landowners, right? If they default in one way or another, if they don't repay the loan.

Mike:
[53:23] Then you can take the land,

Mike:
[53:25] Right? So it gives some element of backing to the entire system. So in that sense, yes, these people are thinking about exactly what you're talking about. Ben Franklin wrote a fascinating essay on this when he was still a very young man, where he referred to money as coined land, right? So this sort of thinking is extraordinarily deep in the American experience. What I find most interesting is that it pops up again and again in completely unconnected places all over the world.

Mike:
[53:53] In Japan, in the 1980s, people talked about the idea of a land standard, precisely because you had this extraordinary boom in land prices, increased hundreds and hundreds of percent in Japan in the second half of the 1980s in particular, and with it, huge, huge amounts of bank lending. And there was a widespread understanding of what was happening. And Japanese economists did ask if they had moved onto a sort of land standard system. I suppose, again, the difference between the gold standard and land in this sense is that with the gold standard, it's, you know, a dollar is directly redeemable from gold. Someone is responsible for doing that. It's not quite that way when we talk about a land standard or anything like it. You know, I can't go through the Fed and get my land back from exchanging it for dollars. But in a very, very real and crucial way, the value of money is supported by this entire system. It is backed to some extent by land. It is the thing that gives the currency some of its value. When people talk about fiat money being backed by nothing, it's true in one sense. And in another sense, because of the collateral, it's sort of hazy as to whether that's the case. It's not as ironclad as a gold standard, but it does support a lot of the value. And you would see that very clearly if the collateral was all decided, as it was in Japan in the 1990s, to be bad.

Mike:
[55:19] You'd see bank lending dry up, you'd see the financial sector really, really suffer, the entire economy suffer. So to that extent, there is a very clear relationship between the value of land and the financial system itself.

Ryan:
[55:32] So I guess there has been some more local kind of experience, experiments with the land standard and early American colonies, for instance. I can understand why that would break down internationally, right? And where the gold standard would still win out because let's say you have some sort of, you're trying to trade between countries and you're trying to use some sort of store value or money to trade between countries. And the currency that you use in the US is maybe backed by land, but would Britain want to accept that currency? How would they then go collect on the debt of that? Will they go invade America, for instance, and take land from some farmer? So I can see why it would kind of break down across international borders, any concept of a land standard. But as I mentioned, maybe we have instantiated a land standard, at least in some form, in all of our fiat currencies and in our credit creation cycles. And to the extent that the dollar is backed by land, there's some truth there. You mentioned Japan. So let's talk a little bit about another land trap,

Ryan:
[56:35] which is the land trap of speculation. It always seems like because of maybe the qualities of land where they're scarce, immobile, and durable.

Ryan:
[56:47] There's a lot of boom busts going on with land. And certainly there's a ton of examples in the US, but I want to shift to Japan because this is one of the biggest ones and it happened in the 1980s. Maybe take us to the 1980s in Japan. I had actually forgotten or like I didn't really, I was not alive during this period of time, so I didn't quite remember the experience of Japan really being on top of the world. You're right. In the 1980s, Japan had the highest per capita GDP of any large economy, the highest. 13 of the top 20 global firms were Japanese banks at that time. They were just dominant, right? Global stock markets full of Japanese companies. Japan was kind of a world competitor to the US. There's lots of talk of Japan kind of taking over. Part of this was fueled by a land bubble. Talk about the 1980s in Japan and what happened.

Mike:
[57:46] Definitely. So there's a few moving parts. I think if you start a little bit earlier than that, if you start with Japan's economic recovery from World War II, which was extraordinarily fast, right? You saw many, many years of double-digit GDP growth. By the 1960s, Japan is wealthier than it was at the beginning of the Second World War, considerably so. When people go to the Tokyo Olympics in 1964 and journalists from the rest of the world see the Shinkansen, the high-speed rail, there's a sort of moment of, you know, what is going on here. This is a country that was meant to be recovering from, you know, the Second World War, being assisted by the US. This is the first example of technology like this anywhere in the world. There was a sort of shift in tone. Through the 1960s, growth continues. Through the 1970s, pretty rapid growth interrupted by the oil crises, but in general, pretty rapid growth. But the financial system that Japan is using to do a lot of this is what we'd call financial repression. So to make sure that companies which are investing and exporting, the big Japanese companies that are expanding over the world at this point, are able to get a lot of bank lending. Deposits at Japanese banks are kept, the interest rates are kept extraordinarily low.

Mike:
[59:07] Right?

Mike:
[59:07] So you've got a country that's growing double digits for a large portion of this time where you're getting a low single digit return on a bank deposit. It's being eaten away essentially by the expansion of the economy and by inflation as well where it comes. So what do you do in this circumstance? You're Japanese. It's the 1960s, 1970s. The development, the stock market at this point is not all that. There's not a lot of interesting financial products and there are capital controls. You can't invest the money overseas, even if you could work out how to do that. The answer is land.

Mike:
[59:44] Land is something you can invest in where you are going to get your share from the economic growth, the economic activity around it, right? Even more so in a world of financial repression where you can't access or invest in other assets. So that is happening. In the 1980s, this basically gets put on steroids. I always think of it as the moment, if you've seen the HBO show Chernobyl, the boron-tipped control rods going into the reactor. Everyone thinks they're meant to slow things down, but they speed things up and you get this exposure. The Japanese economy and the Japanese financial system is dramatically deregulated in the 1980s. And it's mostly deregulated because of this beef that the Japanese government has with the US government. Japanese industrial companies, Japanese manufacturers, car companies carving out huge market share in the US. The American government blames the weak yen, which is caused by the financial repression in Japan and says, you have to open up your financial markets. You have to liberalize your banks. You have to deregulate your financial sector. The Japanese government does most of this, right? The yen rapidly accumulates in value, which is exactly where you get Japan being the richest per capita country in GDP terms, just in FX market translated terms.

Mike:
[1:01:05] But it also releases the banks to lend against land, right? Up until then, a lot of them had really been banks with a very tight relationship with an individual network of companies, big companies. They didn't need that much collateral because they're working very closely together. They understand the company. These small and medium-sized businesses in Japan that they're then lending to, they don't know anything about these companies. And they lend very aggressively against the value of land. Huge amount of loans are going to the real estate industry in general. And you get these absolutely insane circumstances in the late 1980s in Japan. There's a famous one about the land under the Imperial Palace in Tokyo, likely being worth more than all of the land in California at the absolute peak of the bubble.

Mike:
[1:01:52] The total value of Japanese land, I think, is sort of five to six times the total value of land in the United States in this period, right? So it is just an extraordinary boom, right? And it's totally divorced from the value that you get out of the land, right? Rental yields at this point, you're getting a return of sort of 1%, less than 1% in some parts of Japan. So the asset value is completely divorced from its real economic use. And this comes to a sort of crashing end at the very, very end of 1980s and throughout the 1990s. And, you know, people don't talk about this anymore because ultimately, as much as I enjoy Japan and I love going and I love reading and learning about it, on the international scene, it's not anything like as important as it was in the 1980s when it absorbed a lot of attention in the US. And it was a real global player in finance. As you say, you know, Japanese banking states, a huge presence in the rest of the world, hugely valuable companies. I'm not sure that there's a single Japanese bank in the, you know, largest hundred companies anywhere in the world anymore. I'd be surprised if that's the case. I think I have it in the book and I'd be very surprised if it's changed. But.

Mike:
[1:03:05] It's a total reversal.

Ryan:
[1:03:07] And that's the story, right? And that's why the idea of Japanification across the West has become sort of a term for a worry about some sort of bubble bust causing decades of stagnation. So to my knowledge, land prices in Japan still haven't fully recovered to the late 1980s levels. And certainly in the decades after that, Japan has lost. its global leading status as an economy. I mean, economic output, GDP has been mostly stagnant, so have financial returns. At some level, the miracle is that Japan didn't have greater civil unrest on the other side of this because it feels like a 2008 type of event, something that we experienced in the US, times like three or four. I mean, this is an interesting question. Why did the U.S. recover so fast after 2008 relative to something like Japan, which has had, after its boom-bust cycle in housing and land,

Ryan:
[1:04:16] has had decades of stagnation? In the U.S., our stagnation lasted, I don't know, three to five years. The economy's booming. Capital asset's going very well. What was the difference here?

Mike:
[1:04:29] I think there's probably two things. One, the total scale of the Japanese bust is just off the charts relative to the US. You know, we're talking about commercial land prices in the bubbliest parts of urban Japan dropping in aggregate by 80%. There's nowhere that that happened in the US, right? You go to the sort of the craziest expansions in Arizona or wherever you want, the land prices didn't drop by 80%, right? They dropped and it was very painful, but not to that extent. And this is a huge portion of urban Japan as well. It's not a sort of small isolated case. So the bust is much bigger. In terms of the consequences for Japan, it's the slowness in the response from the government that was a big thing. Japan didn't have a proper financial supervision agency like it does now.

Ryan:
[1:05:21] Do you mean slow, Mike, when they saw the bubble kind of inflating? Because this had to be

Mike:
[1:05:25] Obvious to people who are looking at it. I mean when they saw it bursting. Okay. So for starters, people tended to think in the Japanese government, and especially the central bank governor, Yoshihashi Mieno, they thought it was a good thing. Land prices were too high. And they were worried about the consequences of land prices booming. You know, they thought it was sapping the morals of the Japanese people. There's something Mieno said over and over again. And basically, they engineered to some extent the bust. Yasushi Mieno deliberately raised interest rates to try and pop the bubble. When it started becoming obvious the land prices were coming down, he thought he'd won.

Mike:
[1:06:04] And it was only as bank and financial company crises started to really pop up through the 1990s that people started to say, okay, what's going on here? It really wasn't obvious to begin with, at least to Japanese policymakers at all. And the financial supervisors as they came in came up with estimates for non-performing loans right loans that people weren't paying back because they no longer had an asset that was anywhere near valuable enough to you know form the collateral for the loan they had people coming back and every year revising the numbers upwards they were constantly too optimistic or not aggressive enough in doing anything to restructure financial firms to support the wider economy whether that's through sort of Keynesian spending or bank resolution or anything. The US was just much faster at all of these things. You know, Japan doesn't get to a zero interest rate policy for years and years after the crisis. To some extent, Japan is breaking ground at this point in that no other country has been through a crisis in the modern era of exactly this shape and size. So they're still experimenting with things around the edge.

Mike:
[1:07:18] The length of the collapse is, you're quite right, astounding by comparison. And I think I use the example in the book of there are still financial issues at big banks and lending companies in Japan in the very early 2000s as a result of this, right? So can you imagine the early 2020s, there's still being banks going out of business because of the 2008 crash?

Ryan:
[1:07:43] Incredible.

Mike:
[1:07:44] Just incredible. And you're right, again, that, you know, the ability of the population to sort of take the beating is really astounding as well.

Ryan:
[1:07:52] Yeah, part of this is so fascinating because part of this is societal narrative and societal sentiment as well. I mean, you call this the land myth, and that's basically the belief that land prices will always go up. And I think maybe you can get that in a society like Japan at the time, which had capital controls. And so the only thing you could store your wealth in, certainly wouldn't want it in a Japanese bank account in the yen because that would depreciate relative to other currencies. There are capital controls, currency controls in place. The stock market in Japan wasn't a viable option. So where did you put your money for decades and generations? You put it in land. You put it in real estate. And that had worked for people's parents, even maybe their grandparents. And so this became a generational, what do you do? Oh, land price. Land always goes up, I guess, in contrast to the US in 2007, 2008. Land was certainly a core part of the average American's store of value and wealth. It was certainly part of it. It wasn't all of it. I mean, there's a lot of capital in the stock market, in bonds, in other markets. It wasn't highly concentrated. And that, I suppose, is because the US did not have this land myth embedded bottom up in its society because it hadn't had decades of capital controls. Is that part of the story?

Mike:
[1:09:11] I think that's definitely part of the story. And to expand that, I think, although there's not that much sort of research on this, this has to be the big part of the question of why does every East Asian development model success story, South Korea, Taiwan, mainland China, Japan, why have they all had at some point or another, most of them still today, extraordinarily high land and house prices, right? And I think this is a big part of the question here. If you don't have a vibrant, diverse capital market where people can seek out opportunities for profit, turn things into financial products, and have a sort of relatively open market where prices can adjust, you're always going to see this sort of really, really aggressive investment into land because it is very difficult to reduce the returns to it, right? Again, because you're really benefiting from the economic activity surrounding a space, it's very difficult to repress that sort of return. So I think that's an enormous part of it. And I think.

Mike:
[1:10:21] The difficulty of what happens with land around the world is that it's very difficult to know how to get off the train when it's in movement, right? When you see land prices coming up, when you see land as a growing share of wealth, it's very difficult to know how to stop this without causing that kind of crisis. You know, you pop the bubble and you don't know where it's going to end and it can be really dangerous as it was in Japan. One way to prevent it from happening in the first place is having, I think, a diversified, interesting, high return, high opportunity, capital market, dynamic companies that most people can invest in. I think that keeps that sort of speculative mania activity, you know, maybe it pushes it somewhere else, but it keeps it out of the land market. And I think it keeps things a little bit more rational.

Ryan:
[1:11:08] Can we talk about China? So there's some similarities with the Japanese bubble and bust in what happened with China, but then there's things that are completely custom in particular to China. And so China, as I understand it, has had sort of a boom and a bust, maybe a bubble burst in 2020 or so, right? That was the bubble burst. And I think in Western media, we were dealing with COVID at the time, so it was China, of course, but I was kind of barely following this. So I'm not actually sure entirely what happened. But first, help me out with this. So I was I was somewhat confused when I got to this part of the book, at least at first, because is private ownership of

Ryan:
[1:11:50] land banned in China or not? Is it illegal? Like, this is confusing to me. I thought individuals didn't actually have property rights.

Mike:
[1:11:59] It's a great point. And there's a sort of de facto and legal difference here, right? So the Chinese government owns all the land in China, right? That's just the baseline of this.

Ryan:
[1:12:12] Even now, even still.

Mike:
[1:12:13] Even now, even now. Okay. What it sells are essentially extremely long land use rights or land leases.

Mike:
[1:12:21] So when you talk about people buying land in China,

Mike:
[1:12:24] Anyone that's not a government, what we're really talking about is them transacting in use rights that last for a very long time. So this is just a different scene.

Ryan:
[1:12:31] That is very different.

Mike:
[1:12:32] Freehold and leasehold land. It can be, you know, if it's a 75-year lease, that's a long time, right? It's a long time to use it. It can go up in value a lot during that period, especially if you've got the sort of economic conditions you had in China over the past 30 years. But no, the Chinese government technically owns all the land And this allows a, you know, renewal of the leases when they're done or it allows the Chinese government to sell them again so that they're not making private land ownership legal now.

Ryan:
[1:13:03] Okay. But there is some sort of private control through the use of kind of these long-term leases. And that private control wasn't enabled until, I believe, the 1980s, at some point in the 1980s. So how did we go from basically private control of land and there being markets for land in the 1980s and that just becoming a thing to a land bubble by the 2010s? What's that story?

Mike:
[1:13:30] Yeah. So it's very, very gentle and exploratory, shall we say, in the 1980s. The Chinese government copies a large amount of the model that actually exists in Hong Kong. It's funny because obviously the fact that the state owns the land is a residue of Communist Party thinking in China. But it's also a residue of the way the British Empire administered Hong Kong. This is the model that British used in Hong Kong to raise money to run the city. They used land auctions. They leased it out to people. And the government of Hong Kong also owns all the land and did under British rule as well. So that's the sort of adoption of the system. What happened in the late 1980s is the Chinese government, then led by Deng Xiaoping, who sort of solidified himself as paramount leader, is experimenting with all sorts of market mechanisms. And Shenzhen conducts the city just next to Hong Kong, conducts the first land auction.

Mike:
[1:14:31] There's a change in the Chinese constitution made, so you can use these land rights sales. In 1994, there is a major legal change, which basically means that Chinese provinces no longer keep a lot of the tax revenue that they raised, as they previously did. This sounds a little bit dusty. I can understand whenever I talk about the 1994 tax law change, people's eyes glaze over a little bit, but it's really important because it drives these provincial governments towards land sales. It's the only way of them matching their spending obligations and seriously investing in the expansion of their cities at a time when, you know, their Chinese economic growth is absolutely rampant. So land sales become the dominant financing mechanism for Chinese local government and Chinese local government does most of the taxing in China full stop.

Mike:
[1:15:19] So the incentives are all aligned for local governments to drive land prices as high as they can possibly go. And in this endeavor, they meet the increasingly rich or rising income Chinese household sector, which again, because of financial repression, because of capital controls, have nothing to invest their savings in that is worth anything, really.

Ryan:
[1:15:45] Just like Japan. They needed a story of both.

Mike:
[1:15:47] Just like Japan. And so they buy houses. The private housing sector is developing in China in the 1990s, huge amount of building activity. And Chinese households, which save an enormous amount of their income, are buying them hand over fist, right? So you get these crazy real estate development companies like Evergrande in the middle of this exchange. This is sort of intermediary. They're expanding very rapidly. They're borrowing huge amounts of money. by the late 2010s. And really, you can see this coming before then. It lasts an extraordinarily long time. But by the late 2010s, the sort of extremes in this system are nuts, right? You have wealthier Chinese households taking out mortgages to buy second homes, third homes, fourth homes. They're not renting these homes out a lot of the time. They're just sitting on them. They sit empty. So the expectation is they'll just rise in value as property prices have been in China at extraordinary rates for the previous 20 years.

Mike:
[1:16:52] So you get these extremities. In 2021, the government basically calls time on the entire thing. They issue something called the three red lines to property developers. These are essentially three financial metrics based on their total leverage and the amount of cash they hold. And they say, unless you fit all of these, which none of them do, you can't keep borrowing. You can't on net keep borrowing. Some of you, if you're close to hitting them, you can borrow to refinance loans you already have. Those of you that aren't hitting any of them can't even refinance. No borrowing, full stop. So this brings the real estate sector to this extremely quick crunch.

Ryan:
[1:17:32] This is them trying to pop the bubble. Absolutely.

Mike:
[1:17:35] This is them trying to halt the train, right? To jump off the train while it's moving. And it leaves us four years later in the situation we are in, which is a sort of half-deflated government-managed bubble. Real estate prices have actually not dropped by as much as you might expect, but housing market activity has completely stalled. Essentially, I always talk about it as like the Chinese central government tried to pull the tablecloth out from under the feast and keep all the places there, right?

Mike:
[1:18:10] And they've sort of half managed this.

Mike:
[1:18:13] What they haven't done is given either local governments a way to raise significant amounts of revenue. So there's a lot of worries there. They're becoming more indebted in a number of different ways. And the second thing is that they haven't given Chinese households anything good to invest in. Capital controls are still in place. Financial repression is still in place. Chinese equity market is still a mess that nobody would want to invest in in the long term. So, China is still in a place of, it's not like Japan in that we're not living in the aftermath of this enormous bubble quite yet, because it's not been totally popped. The sort of end to this has been very unsatisfying. It's still a huge problem in China. You know, the real estate sector activity is still really, really sluggish, you know, investment in the real estate sector is still falling.

Mike:
[1:19:01] And it's something that it's very hard to know how to deal with in full. It's a huge problem for China. And yeah, it hasn't been resolved.

Ryan:
[1:19:09] It's a huge problem at the same time, Mike. It doesn't seem to have slowed them down. And maybe we'll look to the symmetry here of Japan in the 1980s. So at that time, America was sort of, the narrative out there was Japan is an economic powerhouse. Look at their growth. They're actually going to supersede America as far as economic dominance, or at least that was a possibility that was on the horizon. Now, the US is in a place where it looks over at China as an economic rival. And it really does seem like China is coming for number one spot, right? Look at all the advances in AI and robotics and certainly the manufacturing hub of the world. And even though they have had this property boom bust and this land boom bust, that hasn't seemed to slow them down in the way it slowed Japan down. Japan had decades of stagnation. Do you think China is just handling this better? Are they better equipped? Were they stronger to begin with? What are the differences here? How come they're not facing Japanification?

Mike:
[1:20:12] It's a great question. I am probably a little bit more pessimistic than the sort of mainstream view on this as far as the effects go. So I see, and I think it's a legitimate point and deserves sort of a lot of investigation as to why Japan didn't remain competitive as a sort of frontier productivity place in manufacturing. Still got a pretty vibrant manufacturing sector. It's still interesting companies, you know, come out of Japan, but it doesn't seem to be world leading in the way that a lot of Chinese companies have become. I will take that point. I think the thing that's been discovered in the past few years is that while that's great, those sectors of the economy are just not big enough to replace the real estate sector. They're just much smaller, right? You'd need hundreds and hundreds and hundreds of BYDs to replace this scale of investment, which is absolutely gargantuan. You know, at the peak, we are talking about Chinese real estate market that was worth something in the region of at one point when I was writing about it, when I was at the Wall Street Journal, 52 trillion US dollars, right? That's very big. It's a big sector. It provided a lot of employment. It accounted for a huge amount of investment. And I don't yet see anything in the sort of advanced manufacturing space that counters that.

Ryan:
[1:21:30] So are you saying, Mike, that China's hiding some weaknesses here?

Mike:
[1:21:34] I think it is. I think it is. And to be fair, I think what has happened over the past few years is there has been a clear effort to drive investment in a government-oriented way into the manufacturing sector to offset the decline in real estate investment. I don't think you can continue doing that. And I think even the Chinese government with the sort of the campaigns against involution, sort of unproductive competition, has realized to some degree that there are limits on that kind of expansion. That sector is just not big enough. It's not able to productively deploy the capital it's given without the real estate sector doing its thing as well. So I actually think that, While there's a lot of other stuff going on in geopolitical competition between the US and China, which is really important, I actually am pretty pessimistic about the overall macro outlook for China. And I think that the thing that's been proven over the past few years is that they've gotten themselves into this trap and that there isn't an obvious way of getting out of it. I think you'll see the consequences of that roll on over years and decades.

Mike:
[1:22:42] And we could come back in five years and talk about this again. But I think we'll be living with the consequences of it then as well.

Ryan:
[1:22:48] That is a fascinating insight. It's a contrarian take, but I suppose it comes from your lens of looking at the world through a land perspective, which many financial analysts probably don't do. So as we start to sum this up, fantastic book, by the way, Mike. I thoroughly enjoyed it. You've got a lot of history there. And I've developed a much stronger understanding of land. But I guess the land trap, we've talked about some of the traps that societies face. One is uneven distribution. It's too narrowly distributed. That can be a challenge in many ways. Another is these boom-bust cycles as land becomes kind of the core assets and increasingly financialized. Is there a silver bullet for countries trying to get out of the land trap? Or what would you advise them to do?

Mike:
[1:23:34] That's a great question. And one of the things I really wish I'd found in the book is a silver bullet. I think there are things you can do to ameliorate the situation. You can make it less bad for yourself from a policymaking perspective in a number of ways. One of which is make sure people are able to build housing in the places where land is really valuable.

Mike:
[1:23:57] It doesn't matter the land wealth goes up, right? As long as other forms of real wealth are growing very rapidly as well, right? Nobody cares that a plot in Manhattan is worth $20 million if the building on top of it is worth $500 million, right? It's, you know, most of the wealth is then in the building and that's the sort of productive wealth accumulation that you want. So build where land is expensive. Follow the price signal that land is giving you, I think is one of the biggest possible things you could say. I think encourage the development of a flexible, dynamic, high return capital market where people are able to invest in innovative companies and things like that because it makes land less necessary as a household or a corporate investment.

Mike:
[1:24:47] And I think the third thing is that we will have to think in the years to come about how to tax more of the value of land in the most expensive places. I think this is going to be a thing that's going to come up again and again. We are in most parts of the developed world facing some pretty nasty looking fiscal politics. I don't want to pay any more tax on my income. I can tell you that. I don't think most people do.

Mike:
[1:25:12] We've got demographic issues.

Mike:
[1:25:14] We've also got a group of people that owns land that's gone up very, very considerably in value. So I think to fund things like infrastructure and city level development in particular, we are going to have to look at how to use land, how to harness the financial power of land through the tax system a lot more in the future. I wish any one of those were either easy or you could just do one of them. That's the obvious thing. And that's the easy answer. It would be great if that was true, but it probably wouldn't be a trap if it was that easy.

Ryan:
[1:25:42] And that last one, maybe Henry George making a comeback, Mike, because you're talking about maybe taxing land. But I think the idea maybe, correct me if I'm wrong, but you're taxing the land in particular. You're not taxing the capital or the buildings on top so much. It's the land in particular that is the unproductive side that has kind of the land trap characteristics of being immovable and durable and never changes and highly scarce. That's the part you'd focus the tax regime on?

Mike:
[1:26:09] I think so. Now, if I was designing a tax system, it might not be 100% of land value tax. I'm not considering expropriating everyone who owns land before a sort of angry mob forms. But I do think relative to other things which you can tax, there are a lot of benefits to land. And this is an argument that's come up again and again from a lot of sort of surprising sources. This was Milton Friedman's favorite tax, right? Of which there were very few.

Ryan:
[1:26:36] He didn't like taxes in general, but he's a

Mike:
[1:26:38] Fan of taxes. There are obvious benefits to this, I think. It doesn't sort of frustrate dynamic entrepreneurial, innovative activity in the way that taxes on other forms of capital or on income do. It doesn't frustrate transactions in the way that any transaction-based taxes do. It's based on a windfall that is sort of contributed to by everyone. Everyone in Manhattan coming into work every day is why the land here is so expensive. It's not because the people that own it are geniuses. So I think there's a huge virtue in that. And I hope that does become a bigger part of the political conversation.

Ryan:
[1:27:13] Mike, do you have a minute for just a quick lightning round? Because you are the host of Money Talks and I have like a few financial questions, high level, but it's lightning round time.

Mike:
[1:27:22] Go on. Go on. Absolutely.

Ryan:
[1:27:24] Do you own any land?

Mike:
[1:27:26] I don't. I don't own any land. I don't own any property. I've lived in London, Hong Kong, Singapore, and now New York. And I am a financial journalist, which I think is probably the answer to why I don't own any land. I don't own any land. It's never been the right decision for me.

Ryan:
[1:27:42] Why is gold all time high? What's your explainer for this?

Mike:
[1:27:45] That's a great question. So I got to go to a gold storage facility, one of the biggest private gold vaults in the world when I was in Singapore. And I wrote an article about this in The Economist. And we did a podcast on it. We did money talks on it. There's a number of different reasons, but the biggest driver of activity is huge redeployment of central bank reserves from treasuries into gold. I think a lot of central banks, especially in the developing world or outside of the West got really freaked out in 2022-23 by two things, the very, very rapid resurgence of inflation and the freezing of Russia's reserve assets, the ones held outside of Russia. I think this led to central banks really thinking about gold very seriously. And a lot of private investors have as well. They're worried about the long-term viability of investing in bonds. They're increasingly worried about the inflation outlook and the outlook for the dollar, US fiscal policy, fiscal policy in the developed world in general. So yeah, I think those things are all driving gold, both on the central bank side and among private investors.

Ryan:
[1:28:53] Debasement trade then?

Mike:
[1:28:54] A little bit, a little bit. I mean, the one that hasn't, the sort of dog that hasn't barked here yet, and I'm interested to see whether it happens, is whether you do get institutional allocations starting to develop, because that's where things really get underway, right? You've seen this with crypto, you know, once institutions are sort of forced by their customers to get involved, once you have enough of a howl from people that they want access to this financial product, and you see institutions get involved, then you're maybe sort of off the races, because currently institutional allocations to gold, big asset managers and stuff are effectively zero. You only need to raise that to a very small percentage, and it's a huge bid for gold.

Ryan:
[1:29:32] Are we in an AI bubble right now?

Mike:
[1:29:35] Great question. And if I knew the answer to that one, I definitely wouldn't be a financial journalist. I think there are a lot of bubble-like attributes to it. I think especially on the debt side of investment in things around the AI build-out, that it's very, very difficult currently to justify the potential returns on the lending against the short and medium-term returns on the technology. Now, maybe in the long term, that's completely wrong. And the returns, you know, orders of magnitude higher than anyone can believe there'll be. And this will be a transformation. But the pairing of the technological development and the financial side of things is the really difficult bit. And I think we might have gotten a little bit over our skis there, the people who are lending, especially debt investments for AI buildouts. Yeah, I think so.

Ryan:
[1:30:27] Is cryptocurrency here to stay?

Mike:
[1:30:28] I think so. I think so. I'd be surprised if not. I've long since given up. I'm sure I was one of the financial journalists 10 years ago that would talk about how it's all going to go away and it'll all be very embarrassing, whatever. I don't see how it goes away now.

Ryan:
[1:30:43] No, not all. Is the world too overweight on US capital markets right now?

Mike:
[1:30:47] My difficulty with this is just that, Where else? Where else? It's the contest between US dynamism and what I think of as, you know, US institutional decline and decay. The US dynamism is winning that contest, you know, US institutional decay, putting up a valiant fight. But at the moment, so many of the most productive, interesting companies in the world, the most innovative networks and ideas are still in the US. So if I was to say overweight, you've got to say where else you'd invest.

Mike:
[1:31:22] So I can't say it. No, I think you've got to follow the market on that one.

Ryan:
[1:31:26] Mike Byrd, thank you so much for joining us. Guys, the book is called The Land Trap, A History of the World's Oldest Asset. Is it available now, Mike, or when does it come out?

Mike:
[1:31:35] It comes out on November the 4th, which depending on when this comes out, maybe before, maybe just afterwards.

Ryan:
[1:31:42] Guys, pick that book up. We'll include a link in the show notes. Mike, thanks so much for joining us. Got to let you know, of course, none of this has been financial advice. Crypto is risky. So are land asset prices. You know, we get in bear and bull runs there too. You could lose what you put in, but we are headed west. This is the frontier. It's not for everyone, but we're glad you're with us on the Bankless journey. Thanks a lot.