The capricious nature of money

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The capricious nature of money

Princeton University professor Shin Hyun-song, an authority in international finance, recently mentioned an interesting property of money. He said it was a mistake for emerging economies to raise interest rates to prevent foreign funds from fleeing the country during economic crises. When a crisis hits, the economy becomes sluggish. When the interest rate goes up under such circumstances, corporate and financial institutions struggle further, and foreign investors would leave the country.

Money is extremely capricious. At the end of 1997, the International Monetary Fund demanded Korea raise the call rate by more than 30 percent in order to keep dollars in the country, but the economy collapsed hopelessly. The high interest rate that suffocated the Korean economy was the wrong prescription that was based on misunderstanding the nature of money.

Generally, money is reluctant to get traced and exposed. It is good at hiding itself. Tax investigators fight against the stealthy nature of money. While we think tax audits would result in more tax revenue, it actually has its limits. A far greater volume of money would go underground. This year, the demand for 50,000 won bills has surged, but the volume coming back to the Bank of Korea decreased noticeably. Those in finance think rich people are cashing out their assets and stocking up on 50,000 won bills.

Nowadays, low tax revenue is a concern but, historically, the shortage of tax revenue was most serious shortly after the 1997 financial crisis. The economic growth rate of 1998 plummeted to -5.7 percent. So many companies went bankrupt that the revenue dropped drastically. What contributed the most to the resolution of the shrunken tax revenue was the tax exemption on credit card usage. As tax deductions were offered on credit card usage, people began charging their purchases more. As a result, countless underground incomes were exposed, leading to more tax revenue. It was money ? not the stick ? that brought the hidden money into the daylight.

Money also cannot stand uncertainty. That’s why transactions are not made even when the government announced a real estate tax cut until the tax is actually lowered. This time, the Ministry of Strategy and Finance announced an acquisition tax cut jointly with the Ministry of Security and Public Administration and the Ministry of Land, Infrastructure and Transport. But the housing market is still frozen. The acquisition tax cut can only be implemented when the National Assembly passes a revision. For now, no one can be sure how much the cut will be, when it will be passed, or even if it will be passed. When transactions aren’t suspended, the money flow stops and the market freezes.

The Park Geun-hye government’s goals of a 70 percent employment rate and economic revival through the so-called “creative economy” are directly related to money. These objectives can only be accomplished when the money flow is smooth. The government needs to understand the nature of money well. I hope Deputy Prime Minister of Economy Hyun Oh-seok’s finance and economy team are well-versed in the nature of money.

*The author is a deputy business editor of the JoongAng Ilbo.

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