[Global Column] The Era of Massive Inequality

Many people are hoping that this year will finally mark the end of COVID-19 and the restoration of normal daily life. However, according to various public opinion polls, when asked what the next president’s top priority should be, the majority of citizens mentioned economic recovery and resolving real estate issues as more urgent tasks than responding to COVID-19. As COVID-19 has persisted for two years, the focus has shifted from dealing with the virus itself to addressing the economic problems it has caused.

Some of the economic problems we currently face can be resolved once COVID-19 ends. For example, the economic difficulties experienced by small business owners and self-employed individuals due to social distancing measures can be somewhat alleviated if COVID-19 comes to an end. However, more macroeconomic issues are not the kind that will be resolved simply by the end of COVID-19. Among these, the most important are the asset bubbles and increased debt caused by liquidity expansion.

When COVID-19 broke out, most countries proactively responded to the potential economic downturn by lowering interest rates and expanding fiscal spending. As a result, the increased liquidity worldwide, combined with the economic instability and uncertainty caused by COVID-19, led to a rise in debt and asset values. However, as inflationary pressures have risen beyond asset markets, interest rate hikes are now being implemented globally. Jerome Powell, Chair of the U.S. Federal Reserve (Fed), has clearly expressed his intention to raise the benchmark interest rate to curb inflation.

We have now entered an era of liquidity contraction from an era of liquidity expansion. While it remains uncertain whether 2022 will be a turning point marking the end of COVID-19, it is very clear that 2022 will be a turning point for a rapid change in global liquidity. Interest rate hikes and liquidity contraction centered on the United States, the monetary hegemon, will become a global trend that will be difficult for any particular country to resist. The recent collapse of the Turkish lira and the resulting rise in import prices are phenomena caused by the Turkish government going against the global trend of interest rate hikes.

The contraction of global liquidity can also be seen as a process of normalizing the asset market bubbles that emerged after COVID-19. Interest rate hikes to curb inflation will cause deleveraging, where assets are sold to reduce debt, leading to a decline in asset values. However, just as the rise in asset markets did not bring wealth increases equally to everyone, the reduction of wealth due to falling asset prices will not be distributed equally either. In other words, those who gained wealth from rising asset prices will not be the same people who experience wealth reduction from falling asset prices.

The expansion and contraction of global liquidity that began with COVID-19 will ultimately deepen economic inequality. In this regard, 2022 may be recorded as the year when the era of massive inequality began in earnest. While economic recovery and stabilization of the real estate market are the economic tasks many people hope to see resolved in the short term, the core economic challenge left by the COVID-19 era in the long term is how to address the issue of inequality.

Jae-Hwan Jeong, Professor, Department of International Relations, Ulsan University