‘Fundamentals strong’ again
The author is an editorial writer of the JoongAng Ilbo.
We should be fully aware of the fact that our policymakers say everything is fine, all the time. The government has been repeating that all is normal when the economy is ever worsening. All the economic data have turned alarming, but the president is sure that the economy is moving in the right direction. Their economic awareness is as daft and irresponsible as the crew telling high school students to stay inside in a capsized ferry sinking deeper into the waters.
The worst sign is found in the movement of consumer prices. The consumer price index that stayed sub-zero in August and September edged out of negative territory in October but nevertheless recorded a zero percent increase. Policymakers strongly disagree with deflation theory, claiming the inflation will normalize from next year. But the public has been deceived before. The government assured us that our economic fundamentals were strong although we were near default in late 1997.
Because the country naively believed in the government, the people endured the worst economic period since the Korean War (1950-53). After the 1997-98 Asian financial crisis, Korean companies went down one by one, and so did banks. As many as 2 million jobs were lost after the crisis. If the government had been frank, things could have been different. Kang Ki-jung, senior presidential secretary for political affairs, may lose his temper again and yell at those who say otherwise, but inflation at zero is a serious warning for the Korean economy.
The economy has already started to show typical symptoms of a Japan-like economic depression. Fire sale signs can be easily found at shops across the country. The inflation data is only a reflection of the reality. The gravity stands out when you compare the data with other countries. Korea’s inflation was the weakest — negative 0.4 percent in September — among the member and would-be member countries of the Organisation for Economic Cooperation and Development. Japan maintained inflation between 0.2 percent and 0.9 percent throughout the year. Its price level at least did not fall.
Weak inflation cannot be a blessing as it means a sagging economy instead of stable prices. Low inflation is synonymous with low interest rates and low growth. A bank saving of 100 million won ($86,000) pays an interest of just slightly over 100,000 won. The economy falls under the bad spell of low interest rates.
The outlook is equally gloomy, with our growth potential slashed to the mid-2 percent range. The economy will most likely fail to achieve that growth this year. All of that happened in this administration. If Korea suffers deflation and a sharp waning in growth potential under the same conditions, that is not normal.
Still, policymakers are not worried. Vice Finance Minister Kim Yong-beom stressed that Korea has not entered a deflation phase as deflation refers to a broad price fall for a lengthy period. Bank of Korea Governor Lee Ju-yeol projected inflation to recover to 1 percent by early next year. But deflation led to the Great Depression in America and an asset bubble burst in Japan.
Calling for calm — and denial — can make the economy become a frog slowly dying in boiling water. Will everything become alright if prices return to the 1 percent level when all the signs are similar to those in Japan during the early stages of a long-term depression?
No workable solution is in sight because the diagnosis is all wrong. The government’s ill-conceived “income-led” growth policy will continue to wreck the economy. Domestic demand will weaken, triggering even lower prices. Since many have bought homes on debt, deflation in assets also may be inevitable. The economy is in collective crisis. It is slowly losing life after being spellbound by the mantra that everything will be okay.
JoongAng Ilbo, Nov. 6, Page 30
More in Columns
Tales of Chairman Lee
Chinese way of tackling challenges
Time to step up climate action
Finding our place
Diplomacy is about trust