 Okay, raise of hands. Who in here has heard of the skyscraper curse? Okay, that helps. I am going to explain it anyways, what it is and why it's important and how it can be a fun thing. So we'll start with that. What is the skyscraper curse? I did a Mises view on this back a while ago, so you can find that on Mises.org. The skyscraper curse, I first learned of it in January of 1999. Investors, business daily, and several other financial newspapers. I was actually subscribing to a paper newspaper back then, ran an article about a report given by a real estate analyst from Hong Kong named Andrew Lawrence. And what the article was about was the skyscraper curse and how there was this eerie correlation between the building of a record-setting skyscraper and an economic crisis. So I thought, well, this is fun. It's sort of got to be some kind of economic history going on in here. So I took a look at the article. I actually wrote off and tried to get a copy of the report, which I was able to eventually do posing as somebody else. One of the clients of his company is a very interesting report. In most of the business press, sort of passed it off as just a joke. Just another indicator, like the Super Bowl indicator is supposed to be whoever wins the Super Bowl, whether it's the NFL or the AFL, that's supposed to predict how the stock market's going to do. And the Super Bowl indicator worked really well for the first 11 years, successfully predicting every Super Bowl winner. However, for the next 11 years, it's been less than 50%. So a lot of indicators become famous just because of simple chance. But when I read the report, I realized that what was behind this is not just an eerie correlation or a whimsical concept, but the Austrian theory of the business cycle. And I'm going to basically explain that here today. The skyscraper curse focuses only on record setting tall buildings, not just on the amount of buildings being built, the square footage, things of that nature, but simply on setting new record highs, buildings of livable space. In the correlation or in the economic history going back, the record setters skyscrapers are begun during an extensive bull market. And the curse part is that the record setting skyscrapers are typically completed and opened during an economic crisis. And so these are record setting skyscrapers and economic crises, not your run of the mill business cycles. So the history that was reported in by Andrew Lawrence starts at the turn of the previous century. There was a panic of 1907, which was a significant economic panic. And actually, it was so bad that it was used as a justification for adopting the Federal Reserve Act. So the Singer building and the Metropolitan Life Building were begun before the panic of 1907 and were opened in 2008 and excuse me, 1908 and 1909. Singer is the company that makes sewing machines, which was big business at this time. In 1913, the Woolworth building set a new record. However, there's no noteworthy economic crisis that occurred in the wake. Now, what I found when I went back, I found that the three month period following the completion of this building was the third worst economic quarter in US history to that point. But what might be the case? Why was there no economic catastrophe after this building? World War One was right around the corner. So all the European countries were arming up to get ready for the war. And then of course, once the war starts, they're not building things. They're not growing things. They're fighting one another, destroying things. And so they're buying stuff from the US. So the European War, World War One, prevented an economic crisis from occurring here in the United States. In other words, there was an economic crisis. It was World War One, but the US was benefiting from it. The Great Depression starting in 1929, Forty Wall Street was completed right after the Chrysler building, all three of these in Manhattan in New York City and the Empire State Building, which was begun in 1929 and was finished in 1931. World Trade Towers One and Two and Sears were opened in 1973 and 1974. This was preceded by an economic crash in 1973, a recession and the dollar crisis, the oil crisis. So a lot of things going on there. And of course, there was stagflation in the US during the 1970s. It was a terrible time for a long period of time. The Patronas Towers is associated with the 1997 Asian financial crisis. And the Burj Khalifi Tower in Dubai was associated with the housing bubble and the financial crisis. And I'll give you some more details as to the timing of that. And then the Shard Building in London set a European record. It was begun in construction in 1909. It was topped off in, excuse me, 2009. Having trouble transitioning from century to century here. It was topped off in 2012 and completed and opened to the public sometime in 2013. And that is the period 2009 really to the present of the European economic crisis. Currently, out in the desert in Saudi Arabia, in Jeddah, Saudi Arabia, they're building the Kingdom Tower. It's currently under construction. It's projected to be a world record skyscraper. And it's going to be, it's projected to be one kilometer tall. It's a very tall building. 500 feet of it, however, are not livable space. The building just goes up like this. And the top 500 feet is so narrow that it's unlivable. I mean, you couldn't put elevators, staircases, water pipes, sewage pipes, all that stuff. If you put all that stuff in there, there wouldn't be any room for people to move around. So that's just going to be dead space. So the Kingdom Tower actually only sets the record above and beyond the Burj Khalifi Tower of, I think, six floors. So it seems impressive, but it's really not all that impressive. So the Curse has a pretty good track record of being associated with the important economic crises of the previous century. In 2005, I wrote a paper, I actually published the paper. I wrote it in 2003. It was accepted in 2004 and eventually published in the QJAE Spring issue, our quarterly journal of Austrian economics called Skyscrapers and Business Cycles. And in the paper, what I try to do is to link up what I saw in Lawrence's report or read into his report was that what this was really doing is linking the Austrian theory of the business cycle to the skyscraper curse. And even Lawrence, even though he called it whimsical, and everybody else made fun of it, he actually does mention that these record-setting skyscrapers are associated with low interest rates, booming economy, all that kind of thing. But what I try to do in here is to show that there are really three canty-owned effects that are generated by monetary policy and easy credit policy that are illustrated in these skyscrapers. So I'm not really putting this together as a paper to try to predict the stock market or to predict the economy. Austrians don't strictly speaking believe in scientific prediction. But what I'm trying to show is that these record-setting skyscrapers illustrate to us some of the things that easy monetary policy does to our economy. So it's not just the buildings, these record-setting buildings, but these are effects that are emanating throughout the economy. So basically the three canty-owned effects are all generated by lower interest rates. All three of those are generated by a period of easy credit where market rates of interest are below natural rates of interest or market-determined rates of interest. The first one is that lower interest rates tend to increase land prices and they in particular tend to increase land prices in urban areas. And this is not any new revelation on my part. This is something that's known pretty much to anybody who has experience in the real estate business that lower interest rates tend to generate higher land prices and higher land prices tend to generate taller buildings. As land prices rise, developers and builders have to find a way to make those higher price pieces of land pay off and you make them pay off by building more square feet on a given size piece of land. So that's the first canty-owned effect is higher land prices and higher land prices generating taller buildings. We could see this right here in Auburn during the housing bubble is that the two tallest buildings in Auburn outside of the campus were built during the housing bubble in 2005 and 2006. The second canty-owned effect is that interest rates increase firm size or the size of the firm, the size of the companies. This is a little more complex. In a naturally developing economy, you see a phenomenon whereby certain industries start out as mom and pop operations and then they become city-wide, county-wide, regional, statewide, national and international. And only some types of products really are appropriate for international corporations. But what a lower interest rate does, well the example I give in the paper is dairy farms. With dairy farms, when I was a kid there were cows, dairy farms on the edge of town and the dairy cows that you saw out there, you were going to be drinking the milk the next day. So the structure of production was very direct. The cows ate the grass. The farmer milked the cows. The milk was trucked into one of three dairy operations in town. They put it in cartons and chilled it and then they brought it to your house the next morning. It doesn't get much more direct than that. So the milk I was consuming as a kid was started out a couple hundred yards from my house and then maybe three quarters of a mile to the dairy processing plant and then to my house all in 24 hours. Very direct type of production. But over time what we've seen is that dairy operations become bigger. So the farms get bigger and then they ship the milk not to the town they're next to but they ship them to a processing plant many many miles away. A very large processing plant. And then the milk gets shipped to supermarkets and then you pick your milk up at the supermarket. That's a very indirect process. It's more involved more roundabout. So you've got bigger farms delivering milk to factories in bigger trucks and the factories producing milk automatically and then it being shipped back to the grocery stores and then you pick it up and consume it. Now the difference between the direct more primitive version and the bigger larger more roundabout version is that the bigger larger round more roundabout version needs big corporations to run it. So there's a company headquarters. There's a branch of which they do sales. They do accounting. They do you know worker management automation. And so it's a much bigger operation which in part explains why it's more efficient. But those bigger larger operations they need a headquarters. So they need to have like a headquarters in Atlanta Georgia or Chicago Illinois or New York City. So that instead of locating you know the operations a couple hundred yards three quarters of a mile away from my house all of a sudden now they need a corporate headquarters in a large metropolitan area. So in other words the interest rate folly speeds up this process of a larger regional regional firm who needs a corporate headquarters and therefore needs space in large metropolitan areas. That tends to increase the size of buildings in those areas. And finally and I think most importantly record breakers create new construction technologies because every time you want to set a new record all of a sudden you've got to have better ways of building higher. So you know the cranes that built 70 story buildings don't necessarily work for doing a hundred story buildings. And the cranes they use for a hundred story buildings don't necessarily work for a building that's a kilometer tall. So you need new cranes you need new construction methods you also need new components to go into that inside the building. So you need new elevators you need more efficient air conditioning heating water and plumbing sewage all of those systems in the building have to be economized they have to be more efficient and more effective. So like the elevators on the kingdom tower they go up so high that the weight of the cable that's going to pull it up and down if you use the traditional technology the cable alone would weigh 48,000 pounds. Okay so that's more than the elevator itself. So the power necessary to use the old technology would be so significant and of course those elevators have to be running all the time that it would be practically infeasible if it wasn't in Saudi Arabia. So a company in Germany had to come up with a new better way of doing it and they came up with a cable that would do the same job was actually rated higher that weighed only 2000 pounds it was made out of the same textile material as they make bulletproof vests out of but you drop 46,000 pounds out of the equation in every elevator for every run and you're talking about saving millions of dollars a year just based on the cable that you're using. So things like cranes, elevators, AC the Japanese have invented this process where instead of these all this giant duct work to provide the air conditioning it makes it so cold in here um there's like two feet of space between the ceiling and the floor above it to facilitate the duct work that's necessary to distribute the AC throughout the building. In Japan they've come up with a new invention for skyscrapers whereby there is no duct work. They simply have small tubes small copper tubes that move the freon from one room to another from one side of the building to another and from the individual heating units. So for example you'd have something like this in your room or in your section of the building and this would pump out either hot air or cold air and it would do so based on the fact that there was a tube with freon in it that ran either to the outside of the building and down to the compressor or if you were on the cold side of the building and the other side of the building was hot it would draw in warmer freon from that side into here to create heat in the colder part so there you won't you don't need that two feet of space on every floor you only need an extra inch and a half plus insulation. So now that's great um that they're inventing these things but if we weren't building these super tall buildings in the first place and we weren't setting new records then these technologies would be inefficient they wouldn't be necessary and so what's happening with construction is that they're having to go out and spend a lot of resources to develop these new technologies and then they have to build factories to make those products to make those inputs all of which are unnecessary so we're we're changing the whole structure of the economy just for the purposes of building a few of these super tall buildings and this all three of these things are also happening throughout the entire economy so again the record setting skyscraper is just an illustration something we can tangibly see and dissect but we also want to know that it's happening everywhere in the economy these interest rates are affecting businesses throughout the entire economy okay now to the housing bubble this is where i'm going to take some bows here these are some of the articles that i was writing during the housing bubble this was at a time when basically everybody was telling you are telling others they weren't telling you but they were telling others that you can never lose money in real estate that housing prices never go down and the Fed if you look up this article transparency or deception what the Fed was saying in 2007 and you go back and you look at the leaders of the Fed in their prominent speeches they were saying that the economy is great we are all powerful we've got your back you don't have to worry there's no housing bubble and that these new products that are coming out the financial products that are coming out to the market like credit default swaps mortgage backed securities an economy chicago economist named randall crowsner gave a couple of speeches where he said you know these things are really great they're providing transparency so everybody can tell what's going on and they're providing liquidity so these these things can be bought and sold so you can buy one you can sell it to him he can sell to the other person everybody knows what's going on with those products well it turns out as soon as the housing bubble finished the liquidity in those financial products completely seized up nobody could sell anything to anybody and then when they took a look at what was in those financial products they didn't know what they were and they couldn't find out the assets that were backing and who owned them and who had title all that was completely gone so the market was euphoric everybody was told that housing is wonderful and the Fed was jumping in and saying the same thing at a more sophisticated level so I started out 2004 housing too good to be true and that's when I started getting like hate mail and people you know cost to me I gave a talk at Auburn University shortly after that and uh usually when I talk at the university it's like this many Auburn students come well this time there's a very big room bigger than this and it was pretty much full and it wasn't just college students it was like construction guys and it was like construction guys and developers and bankers and when I turned around I came in like through the back and I came up to the front and I turned around I saw this audience of the it they weren't looking pretty and I realized that there were no doors that what I could get out of and so that Q&A didn't go too well in 2006 I published a working paper the economics of housing bubble it was for a book on housing it's going to be a chapter in a book on housing but when the market crashed the book contract was canceled and so my paper sat around for another three years before it finally did get published and basically all the other chapters in the book were saying how great housing was and why we need fewer zoning and land use restrictions because that's what was causing housing prices to be too high and then there was my paper the first week of August 2005 turned out to be the very top in the home construction stocks you can see that a graph of that on lou rockwell.com this is misesdailylourockwell.com working paper and the rest are lrc except this one new record skyscraper and depression in the making august 7th 2007 2007 and at that time everything was fine there were the u.s stock market and the european markets were at all-time record highs and everything was great a hunky dory in the u.s economy and i was telling everybody there was a depression on the way not many people listened there were only four comments on my blog post i get no respect and i published on lrc uh you heard it here first which was a subversion of the economics of the housing bubble paper because it hadn't been published they let me publish part of it on lrc so using the austrian theory of the business cycle and using the skyscraper curse model i was well attuned to uh to what was going on and the bush caliphi tower set the record oops again the first week of august 2007 but it wasn't completed and wasn't finished and wasn't available for customers to actually take their leases and to move into the building until the early january 2010 and at that point of course we had transitioned from the housing bubble to the financial crisis europe had entered the european debt crisis uh and the owner of the bush caliphi tower was broke he had to have a 10 billion dollar bailout from his cousin uh from qatar i mean what cousin gives a 10 billion dollar bailout the one thing the one thing that it did get though one thing that it did get is the um the tower was originally going to be called the dubai tower uh and in exchange for the 10 billion dollars the cousin got the building named after him so it's caliphi or whatever is his last name um so he got the naming rights for only 10 billion dollars um so it opens in january of 2010 i finally get my moment in the sun as cnn reported on this somehow they i didn't tell them about the blog post but um someone must have or they just did a google search on it um and found that um i had predicted it uh more than two years earlier now since that time uh there's been some academic literature uh on this subject i'm not going to cover the details of that literature uh greg kaza published something in the quarterly journal of austrian economics showing that the skyscraper curse works at the state level someone looked at stock market returns jason bar has been publishing papers on this he was in graduate school at the time of the bush caliphi tower opening um so he's published various factors trying to figure it out whether these record-setting buildings are based on real factors or psychological factors and every paper he seems to switch back and forth but in any case he's published several pieces on this the latest appeared in the journal applied economics recently where he looked at announcement dates and opening dates and whether or not those dates could somehow be correlated with the economy and he found out no they couldn't and so they looked at other measurements of skyscraper building and gross domestic product and they did co-integration tests that show that gdp and height are co-integrated and therefore uh show a common pattern and what that really means is that building height does not predict economic cycles they move together with temporary deviations due to builder competition which is he has previously tested nv social status uh builder competition builder nv a bunch of different things as psychological measures but basically what he's saying here is that skyscrapers don't cause business cycles that it's the economy that in essence causes both skyscrapers and business cycles and so when this paper came out let's see we've got uh Lucas Engelhardt's paper uh Lucas isn't back he supports the 2005 Thornton view great paper so all of these papers um both the pro and the con ones they generally support this idea that that the the economy is in some way generating these record-setting skyscrapers now in terms of deviations from one story from one paper to the next i'm claiming that the cause of the skyscraper curse is in interest rates when the market rate of interest is below the natural rate of interest many of the other papers look at psychological factors optimism builder competition social status and ego are what they're saying causes these record-setting skyscrapers but austrians don't deny the fact that there are social psychological effects over the business cycle people really are depressed during the depression people really are euphoric during a stock market bubble there's no denying that the question is what causes that social psychological change they don't provide any reason for this social psychological change we think it's interest rates so again again builder competition social status and ego um and then their test using the dates of the announcement of the opening of record-setting skyscrapers they say it doesn't fit the empirical pattern of changes in gdp and he also showed empirically that skyscrapers do not curse but that some thing some third factor or factors cause both skyscrapers and curses or changes in gdp so the economist found this paper and they agreed with with bar and his co-authors and just read this bottom line here in other words you cannot accurately forecast a recession or financial panic by looking at either the announcement or the completion of the world's tallest building so they basically said that thorton is wrong and that bar and his co-authors are right and that skyscrapers do not cause an economic crisis now the reason well there's several reasons why this is an inaccurate interpretation one is we agree that it's a third factor that causes skyscrapers and economic crises that's what's in our model it's the interest rate problem causing both skyscrapers and boom bust so the idea that their tests somehow negate our view of the skyscraper curse is just basically wrong and the idea that opening dates and announcement dates would be associated with the skyscraper curse is just wrong we never said that any particular date would be somehow on that specific date that the crisis would begin building skyscrapers is too nebulous a process with you know worker stoppages fires construction errors building code violations all of these things cause delays and sometimes there can be things that speed up the building of a cycle so we don't contend that any particular day would be associated with the onset of a crisis and if we did pick a date it certainly wouldn't be the announcement or the opening day it would be maybe halfway between those things as the best approximation and you can see I think in the the economist picked up on this they agreed with bar but in the same article they put this chart in the article which shows well there's the panic of 1907 in the singer building here's the great depression chrysler empire state here's the oil shock crisis world trade one and two and the willis tower which used to be called the seers tower and actually the willis the people sold the naming rights so it's got a new name now the asian financial crisis occurring simultaneously with the topping off of the patronus towers and the financial crisis coinciding with the building of the bush califi tower right there but see that's 2010 and I was warning people on the blog in 2007 which is exactly under the beginning of the financial crisis so I'm right and they're wrong thank you very much