Fending off U.S. financial shock

The global stock market rally came to an abrupt stop following the biggest stock market meltdown in the United States in more than six years. Speculation that the U.S. Federal Reserve could accelerate tightening amid fast recovery in the economy with increasing jobs and incomes sent treasury yields to four-year highs. The Dow Jones index tumbled by 1,175.21 points, the largest single day loss in history, or 4.6 percent — the steepest percentage fall in seven years. The ripples reached the Asian markets with the Kospi falling 1.54 percent while markets in Japan, China, and Southeast Asia lost by 3 to 5 percent.

The U.S. stock crash is a procedural correction in the normalization of the economy. The U.S. central bank began tapering off its $4.5 trillion quantitative easing program launched in 2008 and lifting the interest rates from zero percent upon signs that the economy was on a solid recovery path. Unemployment has come down to the 4 percent range, and there are more jobs than job-seekers in the United States. Growth has accelerated on revived global trade.

Jerome Powell was sworn in as the new Fed chair on Monday amid increasing inflationary pressure. The Fed has raised the federal fund rates five times since normalization campaign was launched in 2015. The Bank of Korea’s New York office predicted that the U.S. central bank could make four hikes this year instead of the previously predicted three. The Bank of Korea may have to follow as the base rate is already on a par with the U.S. target.

The question is whether Seoul authorities are ready to protect the local economy against negative impact. When interest rates go higher, debt-heavy companies that take up 20 percent in the corporate community will become shaky. Household debt, which already hit 1,419 trillion won ($1.305 billion) in September, could spill over. Higher interest could dampen spending, as well as the housing market. The fragile economy could shrivel.

The Moon Jae-in administration aims to increased the minimum wage by 54.5 percent over the next three years to meet the target of 10,000 won, cut working hours, and give irregular workers permanent positions. But small employers will not be able to shoulder the steep increases in labor on top of the burden of debt financing. The government must revise its economic policy to match the new global economic environment.

JoongAng Ilbo, Feb. 7, Page 30