[Viewpoint] Silent money speaks volumes

Lately there are three kinds of silent money in Korea. The future of the Korean economy depends on how they are handled.
Not only is money constantly on the move, it can also talk. Money can be very loud. With so many scandals, money often features in the news in the Republic of Korea. Money can be found everywhere, from the Park Yeon-cha to the Jang Ja-yeon scandals. From blind money to shady money, sad money to unfair money, all are especially noisy.

However, what moves the world is the silent kind of money. Lately, there are three kinds of silent money noted in Korea, and they all happen to be worth 800 trillion won [$ 595.2 billion]. The future of the Korean economy depends on how the three are handled.

The first is a vagabond. It is vigorous and aggressive. It is omnivorous and ready to swallow just about anything. It is highly volatile and is called the powder keg of the financial market. After building up its muscles when the economy is down, it devours stocks and real estate. This wanderer is hot money. According to the Financial Supervisory Service, speculative funds entrusted to banks, securities firms and insurance companies to be taken out in one year is hot money. This year, hot money increased by 50 billion won in two months. By the end of this year, it is expected to exceed 800 trillion won, the largest in history. It is about three times the annual budget of 284 trillion won and is large enough to buy all listed shares in Korea and then have 100 trillion won left over. As the vagabond grows bigger, the market becomes unstable. You never know when it will explode. Money market funds, or MMF, a super short-term financial product, are the arms and legs of hot money.

A branch manager for a major securities firm met a client about a month ago. The visitor brought 10 billion won with him and asked for a safe place to keep the money for one week. The manager recommended the money market fund. After one week, when it was time to take the money out, the client told him to leave the money in MMF. The same conversation has been repeated every week since. The 10 billion won is still in MMF. The client can take the money out anytime but has no other place to keep it safe.

Patrons of MMF include banks, agricultural cooperatives and insurance companies. The government had released tens of trillion won to the banks to help struggling companies, but the banks kept the money. A fund manager for a bank said, “If we lend to a business that goes out of business, the bank might go down with it. There is no other option but to invest the money in the short term until the market gets better.” This explains why the government’s stimulus money remains within the financial sector. The vagabond feeds on uncertainty. When the economy revives and improves, the vagabond will shrink. The biggest challenge to the financial sector is keeping the size of the vagabond under control.

The second 800 trillion won monster is a starfish. It acts like the sand traps of antlions in the desert. It mainly feeds on the poor. Once you fall into the pit, you can hardly get out. The name of the starfish is household debt. According to the Bank of Korea, household debt reached 802 trillion won as of the end of last year. It grew by 59 billion won in a year. It translates into 16.5 million won in debt for every citizen. The starfish enjoys the gap between the rich and the poor. The bigger the gap, the more poor people it can feed on. While the Kim Dae-jung and Roh Moo-hyun administrations emphasized the middle class and public welfare, the number of prey actually grew. When starfish thrive, other creatures cannot survive around them. When people have no money to spend, consumption declines and the economy is ruined. The social security net needs to focus on getting rid of the starfishes. The third is in China, namely the 800-trillion-won Chinese “New Deal.” It is very busy these days. It has been digging all over the Chinese interior, building roads, bridges and dams. Last year, Beijing announced that it will spend 4 trillion yuan, about 800 trillion won, to stimulate domestic consumption. The future of the global economy depends on how this stimulus package works. China is the biggest trade partner of Korea, so it is very crucial to us as well. The next decade, or even the next century, will be determined by this fund. And there are good signs. Thanks to the construction projects all over China, Korean excavators are in high demand. Korean companies need to change their strategy. They need to concentrate on industries related to domestic consumption and inland, rather than coastal China. And government assistance should also reflect the focus.

When the National Assembly session opens in April, lawmakers need to handle the three 800 trillion won funds very carefully. The 29 trillion won supplementary budget should be passed, but the 800 trillion won vagabond should not grow any larger. We need to curb growth of the 800 trillion won starfish and ride on the back of the 800 trillion won Chinese New Deal. It is the only way to capture the warm spring breeze that has become so rare in the financial market.

*The writer is the economic news editor of the JoongAng Sunday.

by Yi Jung-jae