What is Taiwan's disease? The terrifying balance that The Economist failed to understand: life insurance, tax system, and real estate have jointly kidnapped the New Taiwan Dollar.

A recent article in The Economist directly points to low exchange rates causing Taiwan's disease. Although the Central Bank refuted this and The Economist's perspective is overly one-sided, Taiwan is indeed trapped in a “terrible balance,” forming a systemic co-dependency where no one dares to move. (Background: The Economist diagnoses “Taiwan's disease” as the New Taiwan Dollar being over-devalued, questioning if it is a disease or a financial defense?) (Additional context: Tax on dividends over 20,000 is halted at 2.11% for health insurance! Taiwan's Executive Yuan: Delaying response to public opinion and reducing generational burden) Recently, an issue of The Economist featured a cover story that coined the term “Taiwan Disease,” directly pointing out that behind the stock price frenzy of Nvidia and TSMC, this island is suffering from a deep-seated, structural economic dysfunction. This report sparked intense community reactions, and the Central Bank of Taiwan unusually issued a lengthy five-point statement to refute it, accusing The Economist of using incorrect measurement tools. Subsequently, the exchange rate of the New Taiwan Dollar experienced drastic fluctuations, with market sentiments swinging between panic and anger. More deeply, while The Economist identified the symptoms, the Central Bank defended its methods, yet the true core of the ailment—namely the “systemic trap” that leaves all decision-makers immobilized—remains hidden in the cracks of their debate. This article will dissect the complex system known as “Taiwan Disease” layer by layer. What is Taiwan Disease? The sacrifices behind prosperity First, let's clarify what The Economist actually saw. The so-called “Taiwan Disease” mentioned in the article does not refer to economic recession, but rather a form of “policy-induced malnutrition.” Its core argument is that Taiwan has long implemented a “double low policy” to maintain its export competitiveness in the global supply chain: namely artificially lowering exchange rates and interest rates. Invisible blood vessels The Economist points out that this has been a wealth transfer experiment lasting twenty years. The Central Bank, by continuously buying foreign exchange to prevent the New Taiwan Dollar from rising, has effectively created an opaque subsidy mechanism. Beneficiaries: Exporters (especially traditional industries and capital-holding business owners). They enjoy exchange rate protection and maintain price competitiveness. Payees: Average households, savers, and import consumers. They bear the punishment of weakened purchasing power and real negative interest rates. Clinical symptoms The Economist lists three major side effects of this interventionism: Disruption of labor and productivity: Since 1998, Taiwan's labor productivity has doubled, yet real wages have not kept pace. Companies have become accustomed to relying on exchange rate advantages rather than upgrading technology to pay wages, leading to a continuous shrinking of labor's share in the economic pie. Malicious inflation of asset prices: The Central Bank's release of powerful currency to prevent the exchange rate from rising has, although offset, led to an influx of domestic capital. These excess funds have nowhere to go and ultimately flow into real estate, resulting in housing prices in Taipei being up to 16 times the income ratio. The curse of cash: Real negative interest rates (where deposit interest rates are below inflation rates) mean that honest people who save money in banks are systematically losing their wealth. This is The Economist's view of “Taiwan Disease”: a mercantilist model that sacrifices internal consumption and housing justice in exchange for external accounting surpluses. The Central Bank's counterattack: Winning tactics while avoiding strategy Faced with such severe accusations, the Central Bank of Taiwan responded quickly. They did not directly address the pain of “high housing prices” or “low wages,” but chose to attack The Economist's “measurement tools.” 1. Big Mac vs. iPhone: The data war The Central Bank sharply pointed out that the “Big Mac Index” used by The Economist has serious flaws. The hamburger fallacy: The Big Mac Index suggests that the New Taiwan Dollar is undervalued by 55%, but if we use the “iPhone Index” (considering the purchasing power of tech products), the New Taiwan Dollar is actually overvalued by 17.1%. The reality of capital flows: The Central Bank presented a key piece of data showing that in 2024, Taiwan's capital movements will be 19.3 times that of goods trade. This means that in the modern financial system, the exchange rate is no longer determined by the purchasing power parity (PPP) of a “basket of goods,” but is dominated by massive cross-border capital flows. 2. Logical leaps The Central Bank's conclusion is: Since your diagnostic tool (the Big Mac Index) is unscientific, your accusations regarding the negative effects of “Taiwan Disease” are therefore “unfounded.” Deep structural analysis: Three truths the Central Bank avoids discussing If we peel away the Central Bank's defensive rhetoric, we find that “Taiwan Disease” is actually a “complex deadlock” formed by multiple interests that cannot be easily understood from a single perspective. 1. The real hostage: The $200 billion gamble of the insurance industry Why doesn’t the Central Bank “dare” to allow the New Taiwan Dollar to appreciate significantly? On the surface, it’s to protect exporters, but a deeper fear lies in the collapse of the financial system. Taiwan's long-term trade surplus has created massive foreign exchange, and the insurance industry has heavily invested overseas using policyholders' savings, accumulating over $700 billion in foreign assets. Among them, the unhedged exposure is as high as $200 billion. If the New Taiwan Dollar appreciates significantly, this massive asset would evaporate instantly, potentially triggering systemic financial risks in the insurance industry. Thus, even if the Central Bank wishes to appreciate the currency, it would be “kidnapped” by this structure, becoming a hostage to financial stability. 2. Low interest rates in real estate are just fuel; the tax system is the arsonist Another issue concerning the public is housing prices, often blamed on the Central Bank's low interest rates. To be precise, low interest rates provide the “fuel,” while the cultural belief that “those who own land have wealth” serves as the “base layer.” However, the real disaster originates from tax system failures and policy sparks. Tax system loopholes: Taiwan's extremely low costs of property ownership and zero capital gains tax on securities transactions provide a perfect safe haven for the excess funds released by the Central Bank. These funds do not flow into the real economy but accumulate in real estate and the stock market. Policy sparks: The “New Youth Security” loan policy offers 40-year mortgages and a 5-year grace period, which is a form of financial engineering that allows homebuyers to barely pass bank scrutiny of their “debt-to-income ratio” under the reality of “extremely high total prices.” This not only fails to cool the housing market but instead helps the market bypass risk management, fueling the fire further. The illusion of low prices under subsidies Why hasn’t the undervalued exchange rate sparked widespread public outcry? Because the government has artificially lowered living costs through substantial fiscal subsidies (water, electricity, oil prices). This creates an illusion of “cheap prices,” masking the inflationary pain that a weak exchange rate should bring, while also allowing the low wage structure to persist. This is a form of “anesthetic” that numbs the public's awareness of the ailment. Historical co-dependency under a terrible balance Overall, “Taiwan Disease” is not merely the failure of a single institution but a self-reinforcing “symbiotic structure” that has been operating for decades. We see a perfect “terrible balance”: The Central Bank is held hostage by the insurance industry: Afraid to appreciate, fearing it would trigger $200 billion in exposure. The government is held hostage by the bourgeoisie and voters: Afraid to raise taxes (offending financial backers) and unable to cancel subsidies for water and electricity (offending voters). The public is held hostage by housing prices: For years, the public's assets have been accumulated in real estate, making it a delicate situation where pulling one thread could unravel the whole. Taiwan's decision-makers are currently facing this multiple dilemma. If they are to thoroughly cure “Taiwan Disease,” painful amputations must occur: significant appreciation (sacrificing the insurance industry and exporters), significant interest rate hikes (bursting the property bubble), and significant tax increases (redistributing wealth). However, under the current political system, no party or official dares to press this reset button. The future scenario is likely foreseeable: The Central Bank will continue to make fine adjustments, maintaining the dynamic stability of the exchange rate, while the government will continue to delay the pressure of high housing prices through subsidies and grace periods…