[Desk Column] This Is Not the Time to Enjoy Excessive Liquidity

The CEO of Asset Management Company A, who is quite well-known in the securities industry, recently confessed, "I didn't expect the stock market to rebound so sharply." Most securities experts felt the same way. This is because after the novel coronavirus infection (COVID-19) entered the pandemic stage, not only Korea but the entire global economy rapidly entered a recession phase.

As fear of COVID-19 spread worldwide and projections suggested that it would take at least a year or more to develop treatments or vaccines, even in the shortest term, expectations for a quick economic recovery disappeared. However, the stock market rebounded sharply.

At the end of last year, just before the COVID-19 crisis spread, there was a serious global asset bubble. At that time, the U.S. stock market was hitting record highs day after day, and concerns about a potential crash in real estate prices around the world were raised here and there. In Korea, the dominant view was that corporate earnings would deteriorate, and there were many talks about apartment prices being too high. Given this situation, with the COVID-19 crisis erupting, it was natural that negative forecasts prevailed, predicting not only a sluggish Korean economy but also a collapse of asset markets such as real estate and stocks. What shattered these forecasts was liquidity. Governments and central banks of major countries around the world injected unprecedented amounts of money.

In Korea, money is also overflowing. As of the end of April, the broad money supply (M2) stood at 3,018.6 trillion won. This is the first time M2 has exceeded 3,000 trillion won. M2 includes M1 (cash and demand deposits), money market funds (MMF), time deposits and savings deposits under two years, beneficiary certificates, negotiable certificates of deposit (CD), repurchase agreements (RP), financial bonds under two years, and money trusts under two years?short-term financial products that can be quickly converted into cash. Notably, it increased by 34 trillion won in April alone. The real money gap rate, which refers to the difference between the money supply and the long-term equilibrium money supply, was in the 8% range in the first quarter.

Where did all this money come from? Most of it is debt. Since the COVID-19 crisis, the government, which is pouring massive fiscal resources, relies on issuing government bonds, and companies are busy securing cash through corporate bonds or commercial paper (CP) issuance. As the economy worsens, households are also increasing debt tremendously to secure housing funds and living expenses. Household loans in the financial sector increased by 3.6 trillion won in May and then surged by 8.5 trillion won last month?the largest ever. Among these, mortgage loans grew from 3.6 trillion won in May to 5.1 trillion won last month. Credit loans increased by 3.5 trillion won. This means households are snowballing their debt for apartment pre-sales, jeonse (long-term deposit lease) loans, as well as living expenses and stock investments.

Liquidity has become even stronger through low interest rates. Korea's base interest rate remains at a record low of 0.5%, and mortgage loan interest rates are in the 1% range. Even credit loan interest rates have dropped to the 2% range. Can the asset market continue its current upward trend? Many forecasts suggest that low interest rates will persist for the time being. However, economic agents cannot keep borrowing indefinitely. The speed of household debt increase is particularly risky. Private sector employment is declining, and the government is releasing fiscal funds to create only short-term jobs. Household income is not increasing, but debt is piling up. Households that have been sustaining themselves with debt will soon reach their limit. In a virtuous asset market cycle, debt acts as leverage, providing opportunities to earn more money, but in the opposite case, it becomes a lever for collapse. Warning signals have already been lit in the real estate and stock markets.

Nevertheless, the government has only fueled price surges with real estate policies disconnected from the market. The idea of encouraging direct stock investment rather than investing in mid- to long-term funds is outdated. This is because economic problems are not being solved through market logic but are being pursued only through politics and ideology. It is curious what preparations the government is making for a potential collapse of the asset market bubble.