"The real crisis comes when money printing ends, preparations needed to minimize side effects"

US Fed Maintains Easing Monetary Policy Stance but Doubts Remain
Private Debt

[Asia Economy Reporter Kim Eunbyeol] As global monetary easing is expected to continue next year, economic experts are saying that the real crisis will come when the money printing ends. Led by the U.S. Federal Reserve (Fed), the Bank of Korea and the government have stated their intention to maintain an accommodative stance until the shock from the novel coronavirus disease (COVID-19) subsides, but they cannot keep printing money forever. Experts agree that although the timing is difficult to predict, it is time to start preparing to minimize side effects when withdrawing the historically unprecedented liquidity.

The U.S. Continues Printing Money... Yet Doubts Remain

On the 17th, the Bank of Korea held an internal meeting regarding the results of the Fed's Federal Open Market Committee (FOMC) meeting announced early that day. The Bank of Korea evaluated that the Fed’s clear indication of the duration and scale of asset purchases, supporting credit flow next year, was an expected outcome. However, the FOMC policy statement showed a mixed dovish (monetary easing) and hawkish (monetary tightening) stance, so the Bank of Korea judged that this aspect needs further observation. This means that even if money printing is decided, one cannot simply relax and watch the market flow.

Therefore, the Bank of Korea believes that the Fed’s stance will become clearer in a few months depending on the winter COVID-19 spread and vaccination results. Currently, the stance is mixed between easing and tightening, but if the COVID-19 spread appears to be controlled next year, the Fed may start withdrawing the excessively loosened liquidity.

Side Effects Appear When Liquidity Is Withdrawn... Need for Preemptive Response

The government and the Bank of Korea believe they must prepare for the side effects of monetary easing. Kim Yongbeom, Vice Minister of Strategy and Finance, said at the International Finance Association Winter Seminar on the 15th, "After the COVID-19 situation is resolved, managing liquidity will be a major task," emphasizing the need to consider managing excess liquidity. Park Sanghyun, Executive Director at Hi Investment & Securities, also said, "Quantitative easing (QE) will not stop immediately, but the possibility of eventually reducing liquidity is the biggest concern in the capital market." This could cause market instability as funds flow out of high-yield risky assets.

There are also concerns that accumulated private debt could backfire. Min Jwahong, Director of the Financial Stability Bureau at the Bank of Korea, said, "During the COVID-19 crisis, corporate loans increased indiscriminately, resulting in companies that should have been eliminated remaining." The proportion of marginal companies is expected to exceed 20% this year. If uneven recovery occurs across countries, there is a risk that as advanced countries withdraw funds unpreparedly, shocks could hit emerging markets.

Therefore, economic experts agree that South Korea should focus on taking time to lead structural changes. They emphasize the need to create a foundation where the economy can revive from the private sector rather than government-led efforts. Kim Taejun, Professor of International Business at Dongduk Women’s University, advised, "Regulations on companies should be eased to enhance the capabilities of the 4th Industrial Revolution, and support for low-income groups should be maintained, but instead of just giving fish, they should be taught how to fish."

Economic Recovery Still Far? Positive Indicators Emerging Gradually

Some argue that it is too early to prepare for the post-COVID era. However, positive economic indicators are gradually appearing in various places. South Korea’s GDP growth rate for the third quarter of this year was 2.1%, 0.2 percentage points higher than the preliminary estimate. As a result, the velocity of money, which had been at historically low levels, recorded 0.63 at the end of September, up 0.01 from the end of June. The velocity of money is an indicator of how well money circulates and rose for the first time in over three years since the third quarter of 2017. The Fed also revised its growth forecast for this year upward to -2.4% from the September forecast of -3.7%. The growth rate for next year was also raised by 0.2 percentage points to 4.2%. Expectations for global economic recovery are growing, and commodity prices are soaring, with iron ore prices surpassing $160 per ton.

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