Testing fiscal limits

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Testing fiscal limits


Lee Chul-ho
The author is a columnist of the JoongAng Ilbo.

President Moon Jae-in and U.S. President Donald Trump are entirely opposite characters. But the new coronavirus (Covid-19) has made them the same. They have administered more fiscal stimulus than in wartime and promoted aggressive monetary easing. They gave out generous allowances to the public and have mobilized all possible stimuli means.

The Seoul government will seek a second supplementary budget of more than 9 trillion won ($7.4 billion) on the back of the 11 trillion won extra budget approved by the National Assembly last month. It would have to make tax adjustments in the second half as revenue will inevitably fall short. It may have to create a third supplementary budget, which only happened in the poor days 48 years ago. The U.S. Federal Reserve has raised the bar in expansion. The U.S. central bank now poses as a primary lender, not the lender of last resort. It even offered to buy junk bonds from sub-investment-grade companies.

The radical measures have so far been cheered on. The public applauds such reactions before economies get wrecked beyond repair since few can predict when the virus-driven crisis will end. Few raise voices of concerns about the state’s role or risks of moral hazard. Some even demand more aggressive actions from governments regardless of inflationary pressure or fiscal strains. They want their government to stabilize markets until a vaccine for Covid-19 is found.

The world is testing the limits of financial and fiscal expansion. Governments are pouring out money to the point of risking national bankruptcies. Fiscal integrity is hardly mentioned. Monetary authorities are ready to push interest rates below zero and print as much money as possible. But major news media warn of the grave consequences. If inflation is stoked, interest rates will have to go up. In that case, debt financing is difficult. The Wall Street Journal warned that the government, companies, and households will come under enormous debt pressure. Bloomberg News cautioned about a crash in the U.S. dollar and hyperinflation if doubts are raised about the sustainability of the enormous dollar liquidity.

Of course, the reserve currency won’t likely lose its charm. The United States remains a superpower backed by its economic power and unrivaled military prowess. The euro, yen or yuan cannot replace the greenback. But extreme actions can bring about side effects.


Koreans who lost jobs after the coronavirus outbreak wait to apply for jobless benefits at an employment welfare center in Jung District Office in Seoul Monday. [YONHAP]

One ominous sign is that the markets have grown numb to stimuli measures. The Dow Jones industrial average jumped 6.46 percent when the U.S. congress passed a $1 trillion relief package on March 24. But the Dow rose just 1 percent when the Fed announced a $2.3 trillion loan program earlier this month. The financial markets have built resilience towards fiscal morphine and financial steroid shots. If not backed by the strength in the real economy, the markets won’t respond to stimuli actions.

Another worrying sign on the horizon are skyrocketing international gold prices. Gold prices hit a six-year high of $1,744.8 per ounce. They have jumped nearly 20 percent from late last month. After the Fed opened its coffers wide, investors are rushing to gold. The confidence behind the greenback has been shaken.

The Covid-19 shock threatens our future. An ultra-low interest rate environment will remain normal for some time. With household and government debt swelling, it won’t be easy for the central bank to raise interest rates. When interest rates remain so low, returns in post-retirement savings will be small. Pensions also cannot be a relief as yields will be low. The future has become unstable.

Liquidity has been pumped up to fight the virus disaster before the enormous money spent in the wake of the 2008-09 meltdown has been redeemed. At this pace, social polarization will deepen. Low interest rates and ample liquidity will build bubbles in assets. The Occupy Wall Street campaign may return.

The Korean economy will bare its own realities after the April 15 parliamentary elections end. Applicants for unemployment benefits hit a record high last month. Institutions predict negative growth of 0.9 percent for this year — the first contraction since the international bailout period 22 years ago. An exports-reliant economy cannot pick up if international trade turns sluggish from global lockdowns.

The campaigning and elections ended without any serious discussion of ways to hone our competitiveness and productivity. Rival parties only wrangled over the scope of relief to individuals. While we were preoccupied with the elections, the value of gold has shot up due to waning confidence in other assets. The economy has gone astray.
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