![[유동성의 역습]① The inflation debate on fire… ‘Exchange rate attack’ has already begun](https://image.chosun.com/sitedata/image/202012/31/2020123100793_0.jpg "[유동성의 역습]① The inflation debate on fire… ‘Exchange rate attack’ has already begun")
Input 2021.01.02 06:00
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Due to the novel coronavirus infection (Corona 19), major countries, including the United States, have returned to the era of quantitative easing after 5 years. Central banks have lowered interest rates to the lowest level ever, and have come up with various liquidity supplies, and governments have started large fiscal expenditures. As vaccination begins, the market is already swelling with anticipation that the Corona 19 crisis will end this year. However, there is a growing voice that one day, the’liquidity party’ must be ended, and now it is necessary to prepare for the counterattack of liquidity. [편집자주]
Nine months after the novel coronavirus infection (Corona 19) hit the world, the dollar is flooding the global financial market. The amount of money in the market (M2) of the US increased by 20%, as the liquidity supply of the past level continued before the money that had been resolved by the 2008 global financial crisis was absorbed.
There is already a lot of debate over how enormous liquidity will work after Corona 19. In the first half of next year, warnings began to appear that liquidity could lead to inflation. The main rationale is the change in the US Fed’s monetary policy stance amid the continued decline in the dollar value, and the prospect of an economic recovery due to early vaccination. However, there are many opinions that the possibility of inflation is slim due to the slow recovery of’employment’.
In Korea, there is a high possibility that vaccination will be delayed a bit, and there is also a forecast that’disinflation (a falling inflation rate)’, which maintains low inflation, will come as the self-employment is hit hard by Corona 19. In addition, a fall in the exchange rate can lower import prices, raising the possibility of decoupling (decoupling) between the US and Korean economy.
As Corona 19 began to spread all over the world in March last year, the United States once again supplied liquidity at a record level. As of December 14, last year, the amount of currency in the market (M2) of the United States was 19.29 trillion dollars, up 19.7% from the beginning of March last year (15,5128 billion dollars). Moreover, the US Congress recently passed an additional $900 billion in stimulus bill to respond to the re-proliferation of Corona 19, and further liquidity expansion is anticipated in the future.
It is the early development of vaccines that have begun to ignite the inflation debate. Starting with Pfizer last month, global pharmaceutical companies such as Modena and AstraZeneca have succeeded in developing a vaccine for Corona 19, and 30 countries have started vaccination from the end of last year. For this reason, as expectations for the global economic recovery are growing, the global stock market is getting hotter, hitting an all-time high. It means that the financial market responded before the real economy.
After the vaccine was developed, global forecasting agencies expressed expectations for this year’s economy by raising their growth rate forecasts for each country. On the 16th of last month (local time), the Fed raised the growth rate of the United States last year at -2.4% from three months ago (-3.7%). This year’s growth rate also rose to 4.2% from 4.0% in September.
The reason for the possibility of inflation is that this increase in liquidity and expectations for economic recovery are combined. This is because demand from households and businesses that have been raising the savings rate to the maximum due to uncertainty about the economy is increasing, while the recovery of supply damaged by Corona 19 is likely to be delayed somewhat. This is why Fed Vice President Bill Dudley said in an interview with Bloomberg earlier last month, “If demand increases next year, rapid inflation may be inevitable in a situation where supply capacity is reduced due to Corona 19.”
In addition, the Fed’s shifting the weight of monetary policy from inflation to employment also indicated that it would tolerate a certain level of inflation. The Fed announced in August last year that even if the inflation rate exceeded the target value (2%), on average, it would not respond with an interest rate hike if it reaches the target value. At the same time, full employment was presented as a broad and comprehensive policy goal. The massive inflation caused by the oil shock in the 1970s was put to rest by the US Federal Reserve’s monetary tightening, but now the situation is different.
Kim Jin-il, a professor of economics at Korea University, said, “The scenario where vaccines are widely distributed and the economy resolves faster than expected is the best, but I can’t help worrying about inflation. When I start spending again and start traveling, the supply may not follow.”
Many view concerns over inflation as a trend. The key is employment. The reason why the Fed has previously focused on employment policy is because, above all, it believed that the recovery would be slower than for employment. In fact, the recent global trade volume and exports are showing a recovery trend, but employment and subsequent consumption are continuing to suffer from the re-proliferation of Corona 19.
In the case of the US, the job market is relatively less rigid, so after the end of Corona 19, there may be a significant improvement in terms of the unemployment rate. However, it is difficult for companies to show conservative hiring trends and lead to wage increases due to automation and mechanization conversion. In particular, while the recent recovery trend for young American jobs has been strong, it has been different for the elderly who are vulnerable to infection. It is expected that companies are reluctant to hire for a while, leading to’permanent retirement’.
JP Morgan Economist Park Seok-gil said, “It seems unlikely that prices will rise sharply in Korea as well as globally.”
Unlike inflation controversy in developed countries centered on the US, disinflation concerns are rather greater in Korea. Due to the low birth rate and aging population, the proportion of the elderly population is high, so the saving rate is high, consumption tendency is not large from the beginning, and the uncertainty of vaccination is high. In Korea, vaccination is possible only in the second half of this year, so there is a high possibility that employment recovery as well as consumption recovery will be relatively slow.
The recent decline in the won-dollar exchange rate is highly likely to act as inflationary pressure. This is because an increase in the value of the won against the dollar can lower the import price. If the won’s value rises, it could be an incentive for foreign capital inflows, which could further increase the dollar supply to the market. In order to lower the value of the won, foreign exchange authorities need to intervene or monetary policy adjustments are necessary, but even this is not easy. The involvement in the purchase of dollars to raise the exchange rate is linked to concerns about the US Ministry of Finance’s designation as a currency manipulator, and the monetary policy adjustment is not easy due to concerns over real estate and assets.
Jang Min, a senior research fellow at the Korea Financial Research Institute, said, “If the won goes strong, Korea’s inflation will inevitably go down. Currently, the uncertainty of Corona 19 in Korea is too large, and it takes a relatively long time for vaccination to sustain a 0% inflation level The concern is rather greater.”