[Viewpoint] In a Society Overflowing with Debt, "Who Will Raise the Cattle?"

Hongbeom Kim, Professor Emeritus, Department of Economics, Gyeongsang National University

"If the annual income is 20 pounds and the annual expenditure is 19 pounds 19 shillings 6 pence, one becomes happy; but if the annual income is 20 pounds and the annual expenditure is 20 pounds 6 pence, one becomes unhappy." This is a famous sentence from the 19th-century great writer Charles Dickens' autobiographical novel David Copperfield. Reflecting on his impoverished childhood, he conveyed a heartfelt message of practicing austerity to his contemporaries. Young Dickens attended a factory instead of school due to his father’s imprisonment for debt. At that time, debtors who failed to repay their debts inevitably ended up behind bars. Since then, the world has changed significantly. Now, even when defaults occur, "the reckless lender is blamed more than the imprudent debtor" (The Economist, UK).

Why do we borrow funds? Suppose there is a university student who borrows today based on expected income tomorrow to focus solely on studies, or a company that borrows today to produce goods. If a lender with surplus funds today enters into a loan contract with these debtors (students or companies) to receive a larger amount (principal and interest) tomorrow, it benefits everyone. Enjoying the benefits of finance based on trust in the repayment of principal and interest is the everyday reality for modern people.

Perhaps that is why debt is overflowing in our society these days. Household debt (on a credit basis) was 1,343 trillion won at the end of 2016 before the Moon Jae-in administration took office, and it increased by 519 trillion won (39%) over five years to reach 1,862 trillion won at the end of 2021. During the same period, corporate debt (on a credit basis) rose from 1,642 trillion won to 2,355 trillion won, an increase of 713 trillion won (43%), and government debt (D1) grew from 627 trillion won to 967 trillion won, an increase of 340 trillion won (54%). As a result, household, corporate, and government debt surged by a total of 1,573 trillion won over the past five years (from 3,612 trillion to 5,185 trillion won). This is a staggering five times the increase in nominal Gross Domestic Product (GDP) during the same period (from 1,741 trillion to 2,057 trillion won), which was 316 trillion won. This is a scale and expansion speed that cannot be sustained without blind faith in the possibility of debt repayment. Such blind faith can turn into distrust at any time. That is how crises come. What should we do?

There is no royal road other than repaying debt through growth. For the rapidly aging Korean economy to grow despite its heavy debt burden, reviving the virtue of austerity is more important now than ever. Why is that?

In recent years, due to the skyrocketing prices of houses and jeonse deposits in Seoul and the metropolitan area, the link between income (flow) and housing (stock) has disappeared in our society. The earned income of non-homeowning low-income earners is merely for subsistence; it has become impossible to buy a house with hard-earned money. Thanks to the new empirical rule that stock itself infinitely increases in value disconnected from flow, everyone chases the dream of a big windfall by going all-in on 'yeongkkeul' (borrowing all available funds) loans and 'debt investment' financial strategies. Now, "Who will raise the cattle?"

The top priority for the next government is to restore the link between flow and stock. The people must be saved from long-standing cash (handout) addiction and debt addiction. Welfare policies must be completely redesigned to help overcome withdrawal pains. Rewards should go to individuals who practice Dickensian austerity and work diligently. Enhancing total factor productivity (TFP) through structural reforms and establishing fiscal soundness (a medium- to long-term austerity stance in fiscal policy) are naturally included among the top priorities. However, appropriate short-term economic stimulus can be beneficial for growth.

Kim Hong-beom, Professor Emeritus, Department of Economics, Gyeongsang National University

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