[The Editors' Verdict] A More Perplexing Issue Than the U.S. GDP Shock

Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University

In the second quarter, the U.S. economy shrank by -9.5% compared to the previous quarter. The decisive factor was the decline in consumption in a country where consumption accounts for nearly 70% of the Gross Domestic Product (GDP). Precautionary savings increased, and social distancing led to a significant decrease in service usage. Although the figure is shocking, if it is a temporary phenomenon caused by the global pandemic, it is already a past event. In fact, Germany experienced a -10.1% contraction in the second quarter but shows signs of a green shoot?an economic recovery signal emerging from a recession.

In reality, the structural and complex problems lie elsewhere. The Coronavirus Aid, Relief, and Economic Security (CARES) Act, legislated in March to stabilize livelihoods, includes a Forbearance clause that suspends creditors' rights to exercise property rights such as seizure and eviction. This clause applies broadly, from residential and commercial leases to credit cards, auto loans, and mortgages. The Forbearance clause is intended to alleviate the pain of those who lost jobs due to the pandemic and self-employed individuals facing crises by deferring debt payments for a certain period, but it does not equate to debt forgiveness.

However, this clause is being abused. Financial companies are competitively launching loan campaigns using this clause as bait. These loans are classified as normal. Some tenants reportedly do not have to pay rent immediately and, while receiving various government subsidies, are even buying homes.

Currently, nearly 32 million people, accounting for 20% of the economically active population, are receiving unemployment benefits from state and federal governments. However, statistics on how many of these people benefit from this clause and the scale of their debts have never been released. In a situation where the bottom 90% of income earners are in debt, it is impossible to know how much unpaid debt remains. Currently, even with high credit card debt, people do not become credit delinquents, and credit card companies do not incur bad debts if payments are not collected. However, when tenants do not pay rent and landlords fail to repay mortgage loans, the burden will fall on guarantors, financial companies, and investors, eventually causing difficulties in the financial ecosystem. Therefore, someone has to repay the debt, but it is uncertain when another support measure will be introduced. The U.S. Congress is currently preparing a second support package. It remains to be seen what measures will be taken amid the U.S. presidential election schedule.

When you arrive at Kansas City International Airport in Missouri, you will encounter a portrait of the 33rd president, Harry Truman. Truman is respected because he was a president from a humble background. According to a Pulitzer Prize-winning biography of Truman, his paternal lineage never received proper education. Due to his father's business failure, he could not attend college, and he himself failed in business, but through diligence and sincerity, repaying even his father's debts, he rose to the presidency. Diligence and sincerity were the driving forces that enabled the U.S., along with Germany, to become a superpower within 30 years after the Civil War, overcome the Great Depression crisis, and become the center of the 20th-century world. However, after experiencing two crises in the 21st century, these two virtues have disappeared from American society. The dramatically increased household, corporate, and government debts are evidence of this.

Regardless of whose debt it is, the only entity that can cover debt with more debt is the government. Academia is debating the increasing government debt due to the pandemic. Tax increases are not a likely alternative here because the economy could worsen, and no one desires such a situation. If, as some argue, the government can take on more debt, that would be the best-case scenario. However, if, as some predict, the government tries to repay debt by printing money or selectively defaults on national debt, the dollar-centered international monetary system will inevitably collapse faster.

Kyungsoo Kim, Professor Emeritus, Sungkyunkwan University