[The Editors' Verdict]Will the Dot-Com Collapse of 22 Years Ago Repeat?

The hottest news that heated up the global financial markets last week was the plunge in Netflix's stock price and Federal Reserve (Fed) Chair Jerome Powell's so-called 'big step' remarks. Although these two pieces of news seemed unrelated, they serve as warning signals of a potential massive crisis that may lie ahead for us.

In the first quarter, Netflix's global subscriber count decreased by 200,000. This was the first time in 11 years that the company experienced a decline in subscribers. Furthermore, Netflix forecasted that its subscriber base would shrink by as many as 2 million in the second quarter. The stock price plummeted 35% in just one day.

Netflix attributed the subscriber decline to account sharing, withdrawal from the Russian market, and intensified competition. However, the market viewed it differently, interpreting it as the bursting of an abnormally inflated bubble that had grown during the COVID-19 pandemic. The fact that competitors like Disney also saw their stock prices falter on the day Netflix's shares crashed supports this view.

What shocked the market even more was Chair Powell's statement that "a 0.5 percentage point increase could be discussed at the May meeting." The market anticipates that the U.S. policy interest rate could rise to between 2.25% and 2.5% by the end of this year, which is a full 2 percentage points higher than the current 0.25% to 0.5%. Some even speculate about the possibility of a 'giant step' hike of 0.75% at once. Following Powell's remarks, New York stocks plunged for two consecutive days, and the shockwaves extended to Asian markets this week.

It remains uncertain whether the Fed's rate hikes can tame U.S. inflation, which has surged to a 40-year high. This is because the current inflation results from a complex interplay of demand-side factors and supply shocks. Recently, Russia's invasion of Ukraine and China's COVID-19 lockdowns have further exacerbated the global supply chain crisis. Concerns are rising that high inflation could persist into next year.

The rapid rate hikes in the U.S. could plunge the global economy into an unforeseen crisis. Crises tend to emerge from the weakest links. Countries weakened by the COVID-19 pandemic are already in precarious situations. Following Sri Lanka's declaration of default, warnings are sounding that Pakistan and Egypt's debt levels are also at risk.

As the interest rate gap with the U.S. widens, China has recently experienced yuan depreciation due to capital outflows. With the yen falling to its lowest value in 20 years, Japan has even coined the term 'bad yen depreciation.'

Prior to the Fed's rate hikes, the Bank of Korea preemptively raised its base rate to 1.5%. Nevertheless, the won-dollar exchange rate has surged to the 1,250 won level amid a strong dollar. As foreign capital exits, the KOSDAQ and KOSPI have been weakening day after day. The won's depreciation is pushing up import prices, further fueling already high inflation.

If the U.S. continues to take big steps, the Bank of Korea will have no choice but to follow suit. Small business owners and the 'young-leverage' generation in their 20s and 30s, who borrowed heavily at low interest rates, are already crying out over rising loan rates. There are also concerns that marginal companies, barely surviving thanks to government policies, may face a wave of bankruptcies.

If the U.S. raises rates by 0.5 percentage points next month, it will be the first time since May 2000. The Fed's big step 22 years ago accelerated the dot-com bubble collapse. Some see Netflix's stock plunge as reminiscent of that time. History repeats itself. To minimize the shock, the only option is to prepare in advance.

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