One Year After COVID Market Shock... Money Circulating in the Market 1.6 Times GDP, 'Record High'

[Image source=Reuters Yonhap News]

Money Supply 1.6 Times Nominal GDP

KOSPI Index Doubled on Record Liquidity

From Liquidity Concerns to Excess Liquidity Worries in One Year

As Signs of Economic Recovery Emerge

The Key Question: Will Liquidity Flow to Productive Areas?

[Asia Economy, Reporter Kim Eunbyeol] It has been about a year since the financial markets were shaken by the COVID-19 shock and countries rushed to cut benchmark interest rates to near zero. A year ago, money was injected amid fears of liquidity shortages for households and companies as stock prices plunged, but now the concern has shifted to the record-high liquidity that has been unleashed.

On March 15 last year (local time), the U.S. Federal Reserve (Fed) sharply cut the benchmark interest rate by 1 percentage point in response to COVID-19. This came just ten days after a 0.5 percentage point cut, bringing the rate down to near zero at 0.00?0.25%. The Bank of Korea also held an emergency Monetary Policy Committee meeting on March 16 last year, immediately after the Fed's rate cut, lowering its benchmark rate from 1.25% to 0.75%, a 0.5 percentage point reduction.

At that time, the widespread global spread of COVID-19 was judged to have caused simultaneous real and financial shocks, and countries injected money aggressively to stabilize markets. One year later, the financial market landscape has completely changed. Globally, the money injected has been concentrated in asset markets, while signs of economic recovery are appearing, but many point out that the real economy's recovery remains distant. Here is a numerical overview of the flow over the year following the COVID-19 market shock.

Money Injected into the Market Hits 3,000 Trillion KRW, 1.6 Times GDP... Record High

According to the Bank of Korea on the 16th, last year's annual money supply (broad money, M2) reached 3,070.8 trillion KRW on a seasonally adjusted average basis, surpassing 3,000 trillion KRW. This represents a 9.3% increase compared to the previous year. Monthly M2 figures for last year also showed a continued rise in the M2 growth rate compared to the same months the previous year. For example, in July last year, the year-on-year M2 growth rate reached 10.0%, and by the end of the year, it remained high at around 9.8%.

Considering inflation, the money supply relative to South Korea's economic size reached an all-time high. Last year's nominal GDP was 1,924.4529 trillion KRW, and the ratio of M2 to nominal GDP reached 159.57%, the highest ever recorded. In 2012, the M2 ratio was similar to nominal GDP at 105.03%, and except for 2004 and 2011, it has steadily increased. Recently, the rate of increase has accelerated. Typically rising about 3 percentage points annually, the M2-to-nominal GDP ratio increased by 8.03 percentage points to 146.42% in 2019 and by 13.14 percentage points to 159.57% in 2020.

The velocity of money, which indicates how well money circulates, hit a record low of about 0.62. Entering an ultra-low interest rate era, households and companies increased borrowing significantly, but most of the funds remained tied up in financial institutions, resulting in sluggish money circulation. Last year's fourth quarter domestic gross savings rate was 37.2%, the highest in over three years since the third quarter of 2017 (37.7%).

In the U.S., the M2 growth rate from 2019 to 2020 approached 25%. The U.S. M2 size reached $17.6666 trillion (approximately 19,288 trillion KRW). The velocity of money in the U.S. also plunged from about 1.5 in 2019 to 1.1 last year. The U.S. savings rate rose to 16.2%, nearly double the long-term average.

[Image source=Yonhap News]

KOSPI Doubled from 1,500 to 3,000 in One Year... Liquidity Concentrated in Asset Markets

Based on increased liquidity, stock prices doubled within a year. On March 19 last year, the KOSPI index plunged over 8% in a single day, hitting its lowest level in 10 years and 8 months at 1,457.64. The single-day drop of 133.56 points was the largest ever, and market capitalization evaporated by 90 trillion KRW, falling below 1,000 trillion KRW. Intraday, it even dropped to 1,439.43. On March 23 last year, the market wobbled again. After rebounding to 1,566.15 on the 20th, the KOSPI fell 83.69 points (5.34%) back to the 1,400 range (1,482.46).

However, as central banks worldwide pursued monetary easing policies, asset prices began to rise, and the KOSPI surpassed 2,600 for the first time on November 23 last year. On January 7 this year, it crossed 3,000, and on January 25, it even broke through 3,200 (3,208.99). Although the market has recently undergone some correction, it remains above 3,000. The KOSDAQ index also more than doubled from 428.35 on March 19 last year within a year.

Global stock markets, including the U.S., showed similar trends. The Dow Jones Industrial Average, which fell to 19,173.98 on March 20 last year, has risen to 32,953.46 currently. The S&P 500 index increased from 2,304.92 to 3,968.94 over the same period. The Nasdaq index jumped from 6,879.52 to 13,459.71.

With the continuation of ultra-low interest rates, prices of other assets such as real estate and Bitcoin also surged. According to Real Estate 114 and others, nationwide apartment prices rose 13.46% last year, nearly three times the 4.17% change in 2019. Bitcoin prices in the U.S. exceeded $60,000 per coin. Households reduced consumption amid COVID-19 uncertainties, and asset prices rose faster than income growth, prompting many to invest in asset markets. Companies also tended to tie up funds in real estate rather than investing in facilities or research and development (R&D).

Real Economy Recovery Slower... Challenge Is How to Redirect Money from Asset Markets

While financial markets have not only recovered but are reaching record highs, the real economy is improving more slowly compared to financial markets.

In particular, employment recovery is sluggish. In January, the number of employed persons decreased by 982,000 compared to the same month last year, a sharp contraction. This was the largest decline in 22 years and 1 month since December 1998 (-1,283,000). The seasonally adjusted employment rate for those aged 15 and over was 58.9%, and the seasonally adjusted unemployment rate was 5.4%. The unemployment rate was the highest since 2000.

The Bank of Korea analyzed that the employment shock from the third wave of COVID-19 was even greater than earlier in the year. According to the Bank of Korea's Monetary and Credit Policy Report, the number of employed persons in January decreased by 3.7% compared to February last year, just before the COVID-19 shock hit, which is a larger decline than the 3.5% drop in April last year when COVID-19 first spread widely in Korea. In the early stages of the COVID-19 spread, companies and self-employed businesses temporarily placed employees on 'leave,' but as the situation prolonged, many reduced hiring altogether.

Ultimately, the key is to guide the increased market liquidity to flow into productive areas, but it is challenging to forcibly change the flow of money as long as the COVID-19 shock has not been fully overcome. Solutions proposed include government-led efforts to encourage private companies to enter the Fourth Industrial Revolution sectors. Kim Yongbeom, First Vice Minister of Strategy and Finance, said at last month's macroeconomic and financial meeting, "Abundant liquidity is like a double-edged sword; it is necessary to channel it to where it is needed and build dams to prevent overflow into unnecessary areas." He added, "We will actively manage to promote the inflow of market funds into productive sectors while preventing inflows into unproductive sectors such as real estate."

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