[The Editors' Verdict] Does a Predicted Crisis Never Come?

Complex Crisis Deepens with High Interest Rates, Exchange Rates, and Prices
Beware of Excessive Optimism and Prepare for Systemic Risks

[Asia Economy Reporter Nam Seung-ryul] There is a stock market adage that says, "A predicted crisis does not come." This saying comes from the experience that when many people warn of the possibility of a crisis, they prepare for it, and even if the crisis occurs later, the shock can be reduced accordingly. Another common expression is "A crisis does not come with a warning." This reflects the nature of a crisis that strikes unexpectedly while everyone is off guard. In fact, there have been many such crises. The 1997 Asian financial crisis, the 2000 information technology (IT) bubble burst, and the 2008 global financial crisis were exactly like that. Most people, intoxicated by the boom, failed to sense the imminent crisis. As a result, Nouriel Roubini, who is known for having predicted the global financial crisis, quickly rose to stardom.

What about now? The global economy is shrouded in dark clouds. As the saying goes, misfortunes never come singly. The world economy, which was expected to recover after overcoming the COVID-19 pandemic, is suffering from a series of adverse factors such as the US-China conflict, the war between Russia and Ukraine, high interest rates and a strong dollar due to the US Federal Reserve's (Fed) rate hikes, and inflation. The Korean economy, a small open economy dependent on exports, is struggling with the triple burden of high interest rates, high exchange rates, and high prices.

Moreover, the prevailing analysis is that the worst situation has not yet arrived. The shadow of the Ukraine war, for which Russian President Vladimir Putin has even issued a partial mobilization order for reservists, is likely to deepen further. The Fed, having taken the stance of an inflation fighter, plans to raise interest rates further even after three consecutive giant steps (0.75 percentage point hikes in the benchmark rate).

Meanwhile, the economic team of the Yoon Seok-yeol administration has failed to sound the alarm. While there is no need to incite fear, it is problematic to only present optimistic views in such a situation.

On the 22nd, when the Fed raised interest rates by 0.75 percentage points causing significant turmoil in the domestic stock and foreign exchange markets, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said at an emergency macroeconomic and financial meeting, "We will implement market stabilization measures in a timely manner," but also stated, "Compared to past financial crises, our external soundness indicators are currently in good condition, so there is no need to be excessively anxious." In June, Deputy Prime Minister Choo also said, "The dollar's strength has caused other major currencies to decline, so this cannot be seen as a sign of crisis."

The government's theory that inflation will peak in late September or early October is also likely to be judged as excessive optimism. This is because variables such as winter energy supply instability and rising import prices due to high exchange rates still loom.

The late Queen Elizabeth II of the United Kingdom visited the London School of Economics (LSE) in November 2008, shortly after the outbreak of the global financial crisis, and asked, "Why did no one notice that a credit crunch was approaching?" At that time, British economists, unable to give a clear answer, later candidly admitted the vulnerability of the system to predicting major crises threatening it, saying, "Many people anticipated the financial crisis, but no one could predict exactly what form it would take, when it would start, or how quickly it would spread."

How many people can confidently answer where a crisis that might hit the Korean economy will come from, through what path, and how it will affect it? Instead of only presenting optimistic views while watching public sentiment, it is important to put heads together with private experts to gauge the crisis and devise response plans for various scenarios. Only then can a "predicted crisis" be narrowly avoided.

Nam Seung-ryul, Head of Issue Investigation Department