They Say We Need to Inject Money Due to COVID-19 Impact... But What About the Money Circulation Blockage?

Currency Issuance Balance Surpasses 130 Trillion Won at End of January
Time Taken for Circulating Cash to Increase by 10 Trillion Won Halved
Bank of Korea Struggles Until the Last Moment as Interest Rate Cuts Show Limited Effectiveness

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[Asia Economy Reporter Kim Eunbyeol] "How can we channel market funds to where they are needed?"

There are increasing calls to ensure that cash flows into households and businesses to mitigate the shock caused by the novel coronavirus infection (COVID-19). The problem is that South Korea is in a serious state of 'money stagnation.' Although a large amount of money has been released into the market due to the low-interest-rate trend that began last year, the velocity of money circulation is slowing down, making additional money injections by the central bank less effective. This is precisely why the Bank of Korea is focusing primarily on 'targeted support' despite the economic shock caused by COVID-19.

According to the Bank of Korea on the 11th, the currency issuance balance (end balance) in January this year reached 131.93 trillion won, surpassing 130 trillion won. This is an increase of more than 10 trillion won in just five months since it exceeded 120 trillion won at the end of August last year. The currency issuance balance refers to the amount of currency issued by the Bank of Korea and supplied to the market minus the amount recovered, in other words, the scale of cash currently circulating in the market.

Previously, it took about 15 months each for the currency issuance balance to increase from 100 trillion won to 110 trillion won and from 110 trillion won to 120 trillion won. The time taken for cash circulating in the market to increase by about 10 trillion won has been reduced by more than half.

The indicator showing how well the large amount of money released into the market circulates is also hovering at historically low levels. The velocity of money circulation, calculated by dividing nominal Gross Domestic Product (GDP) by broad money supply (M2), dropped sharply to 0.66 in the fourth quarter of last year. The velocity of money circulation was maintained at around 0.8 to 0.9 during 2005-2007 and was about 0.76 to 0.78 during 2009-2013 after the financial crisis. It fell to 0.70 at the end of 2018.

Ultimately, this means that industrial production activities are not active relative to the money supply.

The money multiplier, an indicator showing how many times the base money creates money, also recorded 15.64, marking a historic low. A decline in the money multiplier means that the economic vitality of each country is decreasing, increasing the monetary cost required for economic growth. South Korea's money multiplier rose to 26.89 times in March 2008 but has shown a downward trend, falling below 20 times in July 2013 (20.77).

Although a global monetary easing trend is emerging due to COVID-19, this is exactly why the Bank of Korea is still deliberating until the last moment. Because money is not circulating and is just accumulating, it is difficult to readily follow the U.S. Federal Reserve (Fed) in lowering interest rates.

Experts' opinions are clearly divided. One argument is that support should be targeted to where it is needed, while the other is that absolute liquidity must be increased first to enable money circulation.

Jang Min, a researcher at the Korea Institute of Finance, said, "Currently, there is no artificial method to induce the flow of cash released into the market toward productive sectors," adding, "The best approach is to prevent funds from flowing solely into real estate."

Oh Seoktae, an economist at Soci?t? G?n?rale, pointed out, "South Korea's monetary policy targets only real estate, not inflation or the stock market, so it has no choice but to delay interest rate cuts as much as possible." He also said, "The U.S. lowered rates because of the financial market, but it seems the government here does not pay much attention to the stock market."

As COVID-19 spreads globally and approaches a pandemic, there are calls for central banks to step in to prevent liquidity shortages among companies. Deloitte's 'COVID-19 Economic Impact' report forecasts that if the situation develops from production → supply chain shocks and market turmoil → corporate liquidity shortages, it could lead to a financial crisis. It warns that not only a deterioration in global growth rates or a reduction in international trade but also an increase in corporate debt problems could lead to a recession.

This content was produced with the assistance of AI translation services.