Crisis, honesty and resilience

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Crisis, honesty and resilience

Koh Hyun-kohn

The author is a senior editorial writer at the JoognAng Ilbo.

The nightmarish three-year Covid-19 pandemic has been followed by an economic crisis. We are going through an unfortunate era. An easy solution to the multiple whammies sweeping the world can hardly be found. There is no central leadership due to the diminished role of the United States. During the global financial crisis in 2008, inflation had not been a worry. Fiscal and monetary stimuli solved the problem. But this time, countries must tackle challenges on their own. The 1997 currency crisis stemmed from emerging economies. Today, every country is busy battling with problems of their own. The U.S. railroaded through the Inflation Reduction Act, while OPEC+ has cut oil and gas output with their beggar-thy-neighbor policy. “We cannot find global concerted efforts as in the past crises,” observed former Financial Services Commission chair Choi Jong-ku.

This crisis could be lengthy. The world endured a dark economic period for a decade in the 1970s from stagflation originating with the first oil shock in 1973 to 1983, when prices finally fell to the 2 percent range. Inflation can be inflammable and untamable. U.S. Fed Chair Paul Volcker was able to stabilize prices only in 1983 after pushing up the base rate from 10 percent to 20 percent from 1979 to 1981.

The Great Depression lasted for 16 years from 1929. The U.S. implemented the New Deal and tightened monetary policy in 1931 and 1937, but still could not find a breakthrough. It was only able to emerge from the depression after World War II. Before the depression, America enjoyed the “Roaring Twenties,” which became the setting for the novel the Great Gatsby.
Bank of Korea Gov. Rhee Chang-yong answers questions from lawmakers before the Strategy and Finance Committee in the National Assembly, September 26. [KIM KYUNG-ROK]

The 2010s were similar. Liquidity from the IT boom and quantitative easing built up bubbles in the stock and real estate markets. Political conditions also were similar. Ultra-right and left forces pitching populism and nationalism arose to threaten global democracy. Russian President Vladimir Putin became uncontrollable with nuclear weapons. Ultra-right Giorgia Meloni, a former fan of Benito Mussolini, is set to become Italy’s first female prime minister. Nationalist politicians also won in France, Sweden, Hungary, Poland and the Czech Republic.

We are alone to battle with our crisis. Deputy Prime Minister for Economic Affairs Choo Kyung-ho, who also serves as finance minister, and Bank of Korea Gov. Rhee Chang-yong must be honest with the people. Laid-back reassurance about the country’s “strong economic fundamentals” before an international bailout in 1997 became a punch line. Their comments were meant not to provoke panic, but they could not help solve the crisis. Information spreads fast through various channels today. Being upbeat without cause to mask reality does not work. The market hardly believes Choo’s prediction that inflation could peak out in October or Rhee’s comment that a gap in interest rates of Korea and the U.S. does not matter. They should warn those hoarding dollars or acknowledge that pain could be inevitable for households and companies just like Fed Chair Jerome Powell has forewarned.

Korea’s interest rates will continue to go up. Rate hikes may become bigger due to unstable oil prices from production cuts, the top rate target in the U.S. could hit 4.5 percent by year-end from current 3.25 percent. The Federal Open Market Committee could deliver a fourth hike of 75 basis points in November and another 50 basis points in December. The lifting would not end, as Powell said that rate increases will continue until prices come down to the 2 percent range. The OECD projects U.S. inflation at 3.4 percent for next year. U.S. rates may not come down to 2 percent in 2023. If inflation cannot be controlled, rates may go higher next year.

Korea’s benchmark rate is 2.5 percent. If the Fed lifts the rate to 4.5 percent this year, Korea needs to raise it to at least 3.5 percent. If the Korean monetary policy board delivers a hike of 50 basis points during the two remaining meetings for the year, in October and November, the key rate would reach 3.5 percent. The rate also could go higher next year. Authorities must warn individuals and companies what is ahead.

The economic team cannot afford to go out of sync during crisis times. Last month, Gov. Rhee indicated a big step increase in an upcoming meeting. But Choo worried about the slowing economy and mounting household debts from the move. The government said it was discussing a currency swap with the U.S., but Rhee said that a currency swap in theory would not help. The fiscal and monetary policymakers must deliver a synchronized message to the market so as not to confuse the market further.

During the 1997 crisis, the central bank clashed with the government over yielding its supervisory role over banks. When the U.S. signed a currency swap of $30 billion with Korea amid the global financial crisis, the government and central bank competed to take credit. The two must work as one team.

The crisis has just begun.
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