Money That Doesn't Circulate in the COVID Crisis, No Sharp Solutions Available

Households and Businesses Temporarily Taking Out Loans Amid COVID-19 Anxiety
Low Interest Rates Leave Few Investment Options Beyond Real Estate and Stocks

Experts Say "Side Effects Have Already Begun, Only Option Is to Endure... Difficult to Resolve"
Calls for Loan Post-Management and Supervision

[Asia Economy Reporter Kim Eunbyeol] The phenomenon of "money stagnation," where money no longer circulates in the market, can be summarized into two main reasons. The biggest cause is the anxiety over not knowing when the spread of the novel coronavirus infection (COVID-19) will end. As the prolonged COVID-19 crisis has already triggered an economic recession, households and businesses are hoarding money without spending it.

Another reason is that interest rates have fallen to near zero, leaving no suitable investment options. Even in difficult circumstances, people naturally seek returns, but the prevailing perception is that there are no better investment options than stocks or real estate. Since stocks and real estate transactions are financial rather than physical, money inevitably remains tied up in financial accounts.

According to the Bank of Korea on the 2nd, the growth rate of narrow money (M1), which refers to cash that can be used immediately, surpassed 20% for the first time in June, reaching 21.3%. M1 is the sum of cash held by the private sector, demand deposits, and checking accounts at deposit banks, representing assets that can be immediately converted into cash. The growth rate of broad money (M2) also rapidly increased to 9.9% as of June. M2 includes M1 plus savings deposits at deposit banks and residents' foreign currency deposits. The Bank of Korea is paying attention to the fact that the growth rate of M1 is steeper than that of M2. This suggests that even when companies and households take out loans, they do not spend the money but hold onto it in their accounts. A senior official at the Bank of Korea said, "The phenomenon of money not circulating in the market is perhaps an inevitable result of lowering interest rates during the COVID-19 crisis," adding, "We acknowledge these side effects to some extent but are closely monitoring whether the trend deviates significantly."

Economic experts agree that since the base interest rate has already been lowered close to the effective lower bound, these side effects were predictable. Professor Andonghyun of Seoul National University's Department of Economics explained, "If past monetary policies were like precision shooting targeting only necessary areas, recent quantitative easing (QE) is like firing a machine gun and hoping some bullets hit the target, but the money that misses the target is flowing into stocks or real estate." He added, "Some explain the decline in the velocity of money circulation by the deepening of financialization (the economic system shifting from cash-centered to credit-centered), but considering the relative size of the financial industry compared to GDP, it is insufficient to explain the current velocity of money circulation solely by financialization."

The problem is that it is very difficult to guide the already released money into productive areas. Similar to Japan, there are concerns that the gap between the real economy and asset prices will widen further, and the 'liquidity trap,' where investment and growth rates do not recover, may worsen.

Therefore, there is a call for methods to manage and supervise whether loans through banks are directed to productive and appropriate areas or truly needy sectors. Professor Kim Kyungsoo, Emeritus Professor at Sungkyunkwan University, pointed out, "In unprecedented crisis situations like COVID-19, creative monetary policies and credit supply are necessary," adding, "After supplying credit, it is necessary to manage and supervise whether it is being used appropriately. Even in cases like financial intermediary support loans, supervision should not be left solely to banks but should be more thorough to enable targeted support."

However, Professor And said, "Although scholars propose macroprudential regulations through the Financial Supervisory Service, it is questionable whether the government or supervisory agencies can effectively block loans or provide loans only to 'necessary areas,'" and added, "For the time being, there seems to be no better option than enduring with fiscal measures." He also noted that the re-escalation of social distancing measures due to the resurgence of COVID-19 makes it difficult to stimulate consumption, which is another problem.

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