Hyperinflation fearsThe head of the International Monetary Fund Dominique Strauss-Kahn and the president of the World Bank Robert Zoellick have warned that large-scale stimulus packages might lead to hyperinflation.
Their comments come as a response to current market behavior. The interest rate for U.S. government bonds has jumped from 2.5 percent per year to 3.9 percent per year within only three months.
The increase in the U.S. deficit and inflation concerns have also become prominent, and international oil prices have exceeded $70 per barrel.
People are translating evidence of growth as a sign that the worst of the recent global economic crisis is over, but concerns over inflation persist. However, the Ministry of Strategy and Finance of Korea says that resolving deflation is more urgent since supply has shrunk more than demand.
A point to note is that the number of people employed in May went down by 219,000 from the same month a year ago, the biggest drop since the financial exchange crisis in the late 1990s.
Few experts predict that serious levels of inflation will hit us very soon. That said, we can no longer cling to stimulus measures.
The government has maintained ultra cheap interest rates and unleashed enormous amounts of liquidity into the market to overcome the economic crisis, and these facts must not be ignored.
Now we should have a longer-term outlook and carefully polish a strategy for a time when the crisis has passed.
A common way to prevent inflation is to absorb currency from the market and reduce expenditures. But it is not easy to raise interest rates and tighten finances when the economy is still so fragile.
However, mechanical responses such as releasing money and lowering interest rates, tactics pursued recently to stop the economic slowdown, must end.
In the near future, we will certainly face difficulties. We will have to restore the economy and curb increases in the prices of commodities at the same time.
The government and the Bank of Korea must be sensitive to economic trends and moves. They need to think seriously about which policy they should take.
Over the past 10 years, several examples of poor policies have led to calamity. We must not forget the dot-com bubble, extremely low interest rates around the world after the 9/11 attacks and excess liquidity that caused a subprime crisis and a global economic crisis. We must draw upon lessons from the past.