Skytree Skews the Skyscraper Theory

Tall buildings don't fit in long-running economic depressions...

JAPAN unveiled the world's tallest free-standing tower last week, writes Dan Denning in his Daily Reckoning Australia.

The Skytree, as the Japanese have called it, tops out at 634 meters. It's nearly two times the height of the Eiffel Tower.

The Skytree is not the world's tallest man-made structure. That title belongs to the Burj Khalifa in Dubai, which tops out at 829 meters. Because the Skytree is mostly a radio and communications platform, without offices and apartments, it gets to claim the title of 'world's tallest tower'. It also has 312 shops at the top, including an aquarium and planetarium.

The so-called 'Skyscraper Index' shows the correlation between financial booms and tall buildings. Nothing says 'speculative financial boom' like a real-estate development taller than anything else in the world. These buildings, then, become a kind of exclamation point marking the end of an era.

But the building of the Skytree in Japan complicates this convenient narrative. It is not a monument to success. It's something else, which we'll get to in a moment.

In the 20th and 21st centuries, the tallest buildings in the world were built in the most dynamic and fastest-growing places in the world, the frontiers of human endeavor. The modern skyscraper itself was born in Chicago and New York. America was the China of the 19th century. Urbanization and industrialization – driven by real rates of return on investment – led to booming financial and commodity centers in New York and Chicago. New building techniques and materials took scarce real estate and built it up, literally.

But take a look at where the 25 tallest buildings in the world will be by 2015. This includes buildings under construction and those that are already completed. Ten of the twenty five are in China (including Hong Kong). Seven are in the Middle East. Three are in Asia ex-China (Malaysia, South Korea, and Taiwan). Four are in the US and one is in India.

All of these buildings can probably be explained in terms of one single boom: the boom from the globalization of the petro-Dollar standard. That boom spread far and wide. It's the boom that's ending now. But that is a story for a different day.
Japan's Skytree is telling for other reasons. Japan is in the midst of a long depression. Its stock market has never recovered from its 1989 high. It has the highest government debt-to-GDP ratio of any industrial nation. And demographically speaking, it has an old population.

The Skytree is a monument to the power of crisis extension. That is, with enough belief and determination, you can forestall the inevitable for quite some time. The Skytree isn't a symbol of a rising economic power. It's like a giant tombstone in eastern Tokyo, towering over an economy locked in financial limbo from too much debt.

You could forgive the Japanese for wanting to have something to celebrate. It's been an absolutely devastating few years. You'd have to be pretty hard-hearted to dismiss the sentiment expressed in the Yomiuri newspaper.

"We would like to celebrate the opening of a structure that Japan can boast about to the world.' 'This will definitely become one of the Japan's symbolic places."

So said 25-year-old Masae Koudo to the paper. That's correct. But what will it symbolize? The Europeans will probably not build a similar tombstone. Or maybe the Euro is their abstract monument to ambition. But don't discount their ability to prolong a crisis.

As Japan has shown, low interest rates can drag out a debt crisis many years without any fundamental improvement in asset quality. That's why – as certain as we are about how this story ends – we remind ourselves to be modest about predicting when. We have no idea.

Perhaps the trouble with building skyscrapers as economic monuments is that the sky really is the limit. You can only build so high before you have trouble getting people and water up to the highest heights. There is also, in Japan, the not insignificant matter of earthquakes and how to dampen them. Modern buildings have overcome many of these challenges, but the future is beyond the sky.

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