Reference News Network November 21 report: According to an article by Daniel Moss, a columnist from Bloomberg's Public Opinion Department, published on the Bloomberg News website on November 18, titled "Why Two Bubbles Are Threatening South Korea's Economic Recovery," the content is as follows:
Key parts of the South Korean economy are showing signs of overheating, and authorities face pressure to cool it down. This is a more challenging area for the central bank, which should proceed with caution.
This is a story about two bubbles: one is the real estate bubble; the other is a surge in massive spending in the artificial intelligence field. The former is within the control of officials, while the latter brings tangible benefits to this export-oriented country and is accompanied by a bubble, but its obvious global nature means the government's ability to exert influence is minimal. Both will affect policy, and Seoul will have to deal with the consequences.
President Lee has clearly warned that the real estate market is on the brink of collapse. He called it a "time bomb" and does not want the Bank of Korea to continue inflating this bubble. Despite four rate cuts in the past year, Bank of Korea Governor Lee Chang-yong, although aware of the risks to financial stability, still tends to further stimulate the economy. However, on November 12, during an interview with Bloomberg Television, Lee Chang-yong admitted that the accommodative monetary policy stance cannot "slow the fire."
Another wave needs their attention: the huge investments in the field of artificial intelligence. Data from Bloomberg Economics show that demand for chips produced by companies such as Samsung Electronics and SK Hynix will drive a 45% increase in shipments next year, nearly double the current level, and accelerate economic growth. Therefore, the Bank of Korea's easing cycle has actually ended.
If further rate cuts occur, it may send a signal that it would be difficult to cut rates again. South Korea's GDP surged in the third quarter, consumer spending remained strong, and the threat of deflation has receded. In October, the inflation rate rose to 2.4%, far above the Bank of Korea's target. Bond yields climbed, and the won strengthened. Considering the overheated real estate market and the fervent demand for AI products, there is reason to question whether raising interest rates is necessary.
Most policymakers say they should not actively prick the bubble. Alan Greenspan, who led the Federal Reserve for nearly 20 years, was unwilling to cool the investors' frenzy. In his most famous and controversial statement, Greenspan questioned the "irrational exuberance" of the stock market at the end of the 1990s. But when it came to taking action to bring the market back to rationality, he backed down. Greenspan believed that the tech-driven stock market rebound reflected profound changes that occur only a few times per century. He also correctly predicted that behind this false prosperity, there were some advancements that allowed the economy to grow faster without inflation. The dot-com bubble did eventually burst, leading to an economic recession in 2001 and a painful and slow recovery over the following years.
The real estate bubble in Japan in the late 1980s was another epic bubble that sparked deep reflection. Before the bubble burst, Japan was widely seen as about to surpass the United States as the world's top commercial power. The Bank of Japan was blamed for tightening monetary policy too late and too sharply. In his book "An Age of Turbulence," former Bank of Japan Governor Haruhiko Kuroda expressed helplessness towards those "forgetful" people. Those who later criticized the central bank for raising interest rates had also previously criticized it for acting too slowly, and officials were always open to criticism regardless.
This is not an excuse for negligence. Kuroda wrote, "The central bank cannot escape criticism. Easy monetary policy is not the only cause of the bubble economy, but without long-term easy monetary policy, the bubble would not have expanded so much."
It is difficult to find the right balance. Greenspan did foresee the consequences and learned lessons from Japan's experience. When asked during a policy meeting in 1997, he admitted that he was powerless and the only available tool was to raise interest rates. According to the meeting minutes, he said, "We have only one tool, yet we have to deal with conflicting objectives. I don't know what to do."
South Korea's economy is performing well, but using rate cuts to "inflate" the economy would be a mistake. As for real estate, long-term demographic factors are as much of a driver as borrowing costs. About half of the population lives in the capital region, and more people are moving there.
No central bank governor likes to hear the claim that they are powerless. Although this exaggerates the limitations Lee Chang-yong faces, doing nothing is not the worst option. He had better prepare to clean up the mess. (Translated by Lu Di)
Original: https://www.toutiao.com/article/7575147320526864896/
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