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Thursday, Aug 11, 2022

Yen for Repeating History

It seems like yesterday. Shuwa Investment Corp., a Japanese conglomerate, paid $650 million for Arco Plaza (now City National Plaza), the office complex in downtown Los Angeles. “Yesterday” was 1986.

At a news conference with stern-faced men and TV klieg lights, I was then a young reporter covering the sale for the Los Angeles Herald Examiner. $650 million! A headline story!

The twin black towers today are perhaps worth half of Shuwa’s price, despite superb reconditioning by the current owner, Thomas Properties Inc. Half, in nominal dollars. After a quarter-century.

Rent in those towers or other Class A downtown L.A. office space was about $3 a square foot per month in the mid-1980s, unchanged much from the late 1970s.

You can still rent Class A space downtown for about that. Or for $1.65 a square foot in the pleasant Petroleum Building.

Is this what they call inflation?

Notably, the Japanese were setting prices for L.A. towers in the 1980s. Back then, an annual feature of a downtown tabloid was a photo map of area skyscrapers decorated by the national flag of the owner. The Rising Sun flew highest.

But starting about 1990, the island nation went into a funk and never really came out. Japanese property markets are down 80 percent in the last two decades, and still falling. The Nikkei (equities) index is down about 75 percent in the same span. The Rising Sun has been setting.

Since 1990, the Bank of Japan has made inflation-fighting its “revealed preference” in economist speak. Since central banks are somewhat Olympian, they deign not answer temporal queries, such as, “What are your targets for inflation and growth?”

So here in beachy Los Angeles, we never really know what is planned by the Bank of Japan, or even by our own Ben Bernanke, head of the Federal Reserve Board, arbiter of U.S. monetary policy.  

But looking around the L.A. real estate world, I can see why some wags are calling the Fed Reserve chairman “Mr. Bernanke-san.”

Commercial properties lost about half their value in the last dump. Residential took a similar whack – and the Business Journal recently reported that in July local house prices were down 4 percent from a year earlier on slower sales. Payroll employment in Los Angeles County has been soft for years, and is still down from 2000 levels.

My reporting days are over, but not my reporting compulsions. I ask fellow business people constantly about the business fates. I can’t remember the last time I heard, “It’s Fat City.”  

The expression “Business is booming” – those happy words of the 1990s – is extinct in the L.A. lexicon.

As in Japan, equities here are sodden. The S&P 500 is below 1999 levels. And troubled, as of late.   

You hear a lot about inflation, mostly from gold-nut types. In reality, the CPI-U is up, but only 2.8 percent in the last three years. You read that right. Less than 1 percent a year.

To be sure, at times it seems prices are rising. Health insurance comes to mind, but people forget as they grow older, they become more risky. Gasoline prices are in your face when you drive.

But there are other more subtle signs of creeping deflation, like industrial rents, $1 burgers, the 99-cent store boom and $99 suits. Dentists offer $10 cleanings and digital X-rays. A newspaper at your door for 25 pennies a day.

You see deflation when you look at City National Plaza, but they don’t put big price tags on office buildings. Japan set the price many moons ago, and then retreated. Why? Tight money has suffocated the country. The yen is strong, but little else is in Tokyo. An obsession with price stability has obliterated other goals.

Remarkably, it was a conservative icon who went to Japan in 1997 and told them not to shrivel up while South Korea and China passed them by. That was Milton Friedman, the late, great monetarist.  

Friedman told the Bank of Japan to print more money until it had a sustained round of moderate inflation that reached into property markets. He advocated forceful quantitative easing. Google the words “Friedman, Japan and Hoover,” if you don’t believe me. Yes, the Hoover Institution imprimatur is on the study – if you get more any more right wing that that, you wear jodhpurs and jackboots.

Preserving the value of a Ben Franklin in monetary formaldehyde may please modern central bankerly fetishes, and people who imagine they are harking to conservative ideals. But politically correct monetary rectitude is savage on L.A. business and real estate, and probably business anywhere after a property bust. Just ask the Japanese.

Mr. Bernanke: Please listen to Milton Friedman. Please print more money. I don’t want our flag to be that of the setting sun. Let Japan keep its flag.

Benjamin Mark Cole is a furniture maker and part-time public relations specialist in Los Angeles. 


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