U.S. quantitative easing is endingThe U.S. Federal Reserve’s $10 billion monthly scaling of the quantitative easing stimulus programs suggests a turning point in the global economy. Citing improvements and a better outlook in the job market, the Fed announced it will reduce its monthly multibillion-dollar purchase of government and mortgage bonds by $10 billion starting January. But it will maintain ultra-low interest rates around zero percent to help the economy recover.
Despite the modesty in the taper action, the move is the beginning of an end for a large-scale artificial monetary stimulus as an emergency life-line to keep the economy afloat after it collapsed amid Wall Street’s meltdown in 2008. The limitless liquidity easing had been an extreme shock therapy. Monetary policy as well as the economy had to return to normal sometime. With stable signs of recovery, the Fed decided the time had arrived for a gentle exit in order not to upset the market.
We must watch the repercussions on our market and economy, which is swayed by foreign investors and overseas factors. Analysts do not believe foreigners will rush out like in the past and wreak havoc on the foreign exchange and stock markets. The country maintains a large surplus in its current-account balance and foreign exchange reserves at over $345 billion. The Korean economy’s fundamentals are relatively sound compared to the economies of the United States and Europe. But a scale-back in U.S. liquidity could still affect the export-oriented economy.
What poses as danger is household and government debt. The economy has long been under the U.S. easing spell. The global-wide loose monetary policy has led to spikes in individual and national debt. Household debt reached 1,000 trillion won ($941.5 billion) and combined government and public-sector debt also at 1,000 trillion won. The U.S. taper will likely pressure interest rates to go higher. People and country would have to seek more debt in order to pay off interest rates.
The ultra-loose policy is coming to a close around the world. Volatility in financial and foreign exchange markets in the short-term would be unavoidable. Authorities should closely monitor the markets and come up with a long-term strategy to change the economic structure.
Individuals and the government would have to reduce debt and corporate restructuring should be accelerated. The Korean economy remained resilient even when other emerging markets crashed on expectations of U.S. tapering in quantitative programs in September. The action also could serve as a momentum to the Korean economy.