The economy feels the tremorsSecurity is not the only vulnerable spot in South Korea after the PyeongChang Winter Olympics. The Constitution defines a president’s duty as defending the lives of the people and enhancing their well-being. Solving the North Korean nuclear threat is obviously part of the South Korean president’s duty to protect the public. Less obvious is what he must do to defend his country against a global stock market meltdown, which would obviously have an effect on the well-being of the public. But the idea raises questions of whether the Blue House has the will or capability to fulfill President Moon Jae-in’s role as defined by the Constitution.
After U.S. stocks crashed last week, the White House issued a statement that President Donald Trump is focused on the country’s “long-term economic fundamentals, which remain exceptionally strong.” That was supposed to appease concerns in the market. It indicated the government would take action if losses extended beyond a normal correction. “We’re always concerned when the market loses any value, but we are also confident in the economy’s fundamentals,” a White House official said.
The Wall Street shockwave rocked domestic markets. The secondary Kosdaq saw its biggest losses in 11 years on Monday. The local bourse lost nearly 140 trillion won ($128.8 billion) — more than double the entire gains of this year — over the last three sessions. Foreigners sold off over 3 trillion won in Korean stocks. The local currency naturally plummeted. Yet the Blue House hardly took notice.
It may have misread the Wall Street-triggered equity crash. “The global equity bull run for nine years is coming to a stop to make way for a tightening stage,” said Cho Jae-min, chief executive of KB Asset Management. The latest meltdown is a “harbinger of a new market order,” he said. He stressed that the government should be prepared to draw up policies based on the most recent developments.
Local markets, which were inundated with easy money following the 2008 financial meltdown, were bound to undergo a correction once they entered a recovery phase. Yet the shift has come suddenly. What triggered it was the U.S. job data released last Friday. Wages increased by 2.9 percent, the biggest jump in a decade. Along with job additions, income increases will add inflationary pressure and accelerate monetary tightening by the U.S. Federal Reserve. The equity markets tumbled on worries about lower corporate profitability after interest rates rise. Coincidentally, a new chief for the Federal Reserve took office on Monday. The stage has been set for a period of monetary tightening to fend off inflation.
The tightening tantrum, as we can call the recent panic, is just beginning to take its toll. The Federal Reserve may deliver periodical hikes through the year starting with an expected raise in March. Our monetary authorities may mimic the move. Inflationary pressure from higher wages would push the central bank to raise the interest rates and hurt the bottom line of Korea Inc. The government’s pushing up of the minimum wage will only aggravate the situation.
All of that spells trouble for our colossal household and national debt. Volatility in foreign exchanges and speculative funds could shake not only the capital markets, but also the economy. If geopolitical risks from North Korea escalate, the economy could face a crisis from flight of foreign capital and a nosedive in the value of the won. The damage may not end with some stock market losses this week.
Markets speak in numbers. The markets must be watched closely for a long time to understand their language. A good doctor wouldn’t miss the slightest symptoms in his patients. In addition to a careful eye, he must be capable of making timely and accurate prescriptions and treatment. The top economic aides and advisers — Moon’s policy chief, economic aides and senior secretary — are all from academia. They learned economics out of textbooks, not in the field itself.
A New York Times reporter said in a column that he has been looking at job data for 10 years, but the meaning of the numbers have been different every month. A good policy is only possible from reading the numbers correctly. The numbers tell where more money is needed or what corporate areas need to be deregulated to make more jobs.
The future of the Korean economy is already murky. There are no solutions to the damages caused by the minimum wage hike. The trade front has become more difficult due to heightened trade barriers in the United States and China. As the battlefields have gotten tougher, our horses have become weary. One misstep could cause soldiers to fall off their horses. Yet the commanders in the Blue House are leisurely fidgeting with books and theories.
JoongAng Ilbo, Feb. 8, Page 30
*The author is a columnist of the JoongAng Ilbo.