[Initial Insight] Changed Narrative and the Trap of Household Debt

[Asia Economy Reporter Sim Nayoung] "If you don't buy now, you'll never be able to buy." This narrative, which stirred up South Korea until early last year when housing prices soared, was common. It was normal for apartment prices to jump by hundreds of millions of won, and even those unable to repay their debts attempted 'yeongkkeul' (borrowing to the maximum). Comparing it to Robert Shiller's 'Narrative Economics,' this story spread rapidly like an epidemic and had a significant impact on the economy. It was literally 'panic buying.'

Many things have changed in a year, and the narrative sweeping the market now has turned 180 degrees. "Nothing hasn't gone up" (inflation), "If you borrow money now, you'll go bankrupt" (interest rate hikes). Usually, interest rates are raised to cool down an overheated economy, but this year is an exception. Inflation and economic recession are occurring simultaneously, and the ghost of stagflation has begun to haunt. Experts have started referring to stagflation that occurred during the 1973 oil shock. Public opinion is also stirred. The number of Google searches for the word 'stagflation' reached 100 in June this year, with 100 representing the highest search frequency. This is much higher than the peak of 88 during the 2008 financial crisis.

As the economy worsens and interest rates rise, some breathe a sigh of relief. The Financial Services Commission, which caused banks to implement a 'household loan shutdown' at the end of last year, is one such party. Inside the FSC, voices say, "We were heavily criticized and even ranked last in performance evaluations, but if we hadn't tackled household debt then, what would have happened in a situation like now?" and "This opportunity has clearly proven that the FSC plays a role in financial stability." At that time, the FSC declared an all-out war on household debt, limiting the growth rate of bank household loans and strengthening regulations to ensure borrowing only within repayment capacity. Fortunately, household debt has been declining for six consecutive months this year. At a time when interest rates have soared and many have become 'interest poor,' having to pay a month's salary annually in interest to banks, the FSC's proactive response deserves recognition.

However, the market narrative has changed. What was true then may soon no longer be so. While interest rate hikes are inevitable this year to curb inflation, the next phase must be considered. It is necessary to prepare for the possibility that a hard landing of household debt could reduce consumption and deepen the real economy's recession, causing an 'overkill' (excessive response). Signs are already appearing. Tesla inventory, which was said to be impossible to keep in stock, has begun to accumulate, and construction companies are even giving up on main bids for reconstruction projects. This is due to rising car installment interest rates and difficulties in borrowing money from banks to buy houses. If the economy worsens next year, the central bank will need to adjust the pace of interest rate hikes by accepting some level of inflation, and the FSC will need to lower loan thresholds for real demanders.

After the Great Depression in 1929, the narrative of 'frugality' spread like a trend in the United States. It was a psychological product born from the recession. The Wall Street Journal wrote an article about a bicycle craze because people worried that owning a new car might be seen as an unrefined display of wealth, and churches criticized the display of wealth as bad taste, condemning expensive pleasures. This halt in consumption unintentionally worsened the Great Depression. Things that seem desirable can become 'hidden traps' depending on the timing. Continuing as before after the situation changes may lead not to household debt suppression but to a deepened economic recession trap.

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