Money Still Not Circulating in the Market... Currency Velocity Hits All-Time Low

June Money Circulation Speed 0.60... Lowest Ever Recorded

*Source: Bank of Korea

[Asia Economy Reporter Kim Eunbyeol] As the application for the COVID-19 coexistence national support fund (5th disaster relief fund) begins on the 6th, it has been revealed that the money released during the COVID-19 response process had not circulated properly in the market even until June. Although the amount of money released was the largest ever, the increased funds still have not flowed into productive areas such as investment and employment.

The continuation of the low-interest rate policy in the 0% range is also a reason why there is a stronger tendency to hold onto money rather than spend it. The Bank of Korea raised the historically low base interest rate from 0.50% last month to 0.75%, and attention is focused on whether the speed at which money circulates in the market will accelerate again due to the interest rate hike.

According to the Bank of Korea on the 6th, the velocity of money circulation, calculated by dividing nominal Gross Domestic Product (GDP) by broad money supply (M2), fell to 0.60 as of June, reaching a record low. The velocity of money circulation refers to the number of times money is used in transactions over a certain period. A decrease in the velocity of money circulation means that money is not circulating well in the market.

Due to the COVID-19 shock in the second quarter of last year, quarterly nominal GDP dropped to about 474.6695 trillion won, but it increased to 501.2481 trillion won in the first quarter and 511 trillion won in the second quarter of this year. While the numerator in the velocity of money formula grew as the economy improved, the denominator, M2, also increased rapidly, so the velocity of money circulation inevitably fell compared to last year.

Another indicator showing how well money circulates in the market, the money multiplier, also dropped to 14.22 as of June. Although this is slightly higher than the 14.17 recorded in March, it remains at a historically low level in the low 14s since the Bank of Korea began compiling statistics in 2001. The money multiplier is the value obtained by dividing broad money supply (M2) by the monetary base, indicating how much the money supply increases when the central bank supplies one unit of currency.

Meanwhile, M2 stood at 3,411.9 trillion won as of June, an increase of 26.8 trillion won from the previous month. The broad money supply indicator M2 includes cash, demand deposits, and checking deposits (all part of M1), as well as money market funds (MMF), time deposits and savings deposits under two years, beneficiary certificates, negotiable certificates of deposit (CD), repurchase agreements (RP), financial bonds under two years, and money trusts under two years?short-term financial products that can be quickly converted into cash.

M2 first surpassed 3,000 trillion won at the end of April last year due to the COVID-19 crisis. Since then, it has continued to increase sharply, setting new monthly records.

Experts advise that the government should not only inject money into the market through fiscal policies but also guide funds to flow into productive sectors. While it is true that uncertainty caused by the COVID-19 situation has contributed to sluggish corporate investment and employment, easing regulations to make it easier for companies to invest and providing incentives for increasing employment can unblock the flow of trapped funds.

A survey conducted by the Korea Economic Research Institute through Research & Research targeting the top 500 companies by sales found that only 32.2% of the 121 respondent companies had plans for new hires in the second half of this year. The rest either had no plans for new hires (54.5%) or responded that they would not hire anyone (13.3%).

The rapid growth of asset markets, with financial and real estate markets expanding faster than the real economy worldwide, is also a factor slowing the speed of money circulation. When loans are taken out to invest in stocks or real estate, money is likely to remain dormant in financial accounts.

There is also analysis that increasing the money supply through disaster relief payments causes asset prices to surge. The Korea Development Institute (KDI) analyzed the impact of money supply increases on housing prices in a report titled "The Ripple Effects of Money Supply Increase and the COVID-19 Economic Crisis" released in December last year. According to the report, based on economic modeling, "When the money supply increases by 1.0%, housing prices rise by about 0.9% over one year."

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