Bracing for an exit

Household debt hovers at dangerous levels. Outstanding household credit hit a record high of 1,765 trillion won ($1.6 trillion) in the first quarter, according to the Bank of Korea. Household debt refers to personal loans from banks, insurers and other financial institutions as well as credit card usage. Inflationary pressure is building up amid colossal debt. The consumer price index gained 2.3 percent in April from a year ago, the biggest rise since 2.5 percent in August 2017 and exceeding the government target of 2 percent.

Asset investment is largely behind the ever-growing household debt. Individuals have dug up all the money they can come up with to invest in stocks and cryptocurrencies. According to the Financial Services Commission, 32.7 percent of new subscribers, or 816,000, at the four major cryptocurrency exchanges including Bithumb and Upbit were in their 20s, and 30.8 percent, or 768,775, were in their 30s in the first quarter. Half of crypto investors who joined the market this year were in their 20s and 30s.

Increasing private debt coupled with inflation is a phenomenon around the world due to record government spending and ultra-monetary easing for two years to fight Covid-19. The U.S. is moving toward tapering and tightening. Minutes from the Federal Open Market Committee in April showed the U.S. central bank is thinking about tapering or winding down asset purchases. Slowing asset purchases or stimuli from the world’s most influential central bank causes a tantrum in financial markets across the world. A U.S.-triggered upset can send shockwaves across the world. The Korean central bank may also have to follow suit if the Fed raises the benchmark rates.

As the higher interest burden could lead to a string of individual bankruptcies, social repercussions are inevitable. A mother and son took their own lives after losing big on stock and cryptocurrency investment. A financial crisis could stem from household troubles.

The markets will be closely watching the action and remarks from the monetary policy meeting on Thursday. Authorities must clearly ready the market and individuals for rate moves to lessen the shock. Households in the meantime must endeavor to reduce their debts.