[Insight & Opinion] Korea's Debt Problem and Pascal's Wager

"Does God exist or not? Which side would you bet on?" Blaise Pascal, a 17th-century mathematician and scientist, applied probability theory to answer this question. To get straight to the point, he concluded that believing in God's existence is probabilistically advantageous. In fact, there is no precise way for humans to ascertain God's existence. However, it is worth considering from a probabilistic perspective. What if you bet on God's non-existence, but upon entering the afterlife, you find that God does exist? Then you would fall into hell. Conversely, if you bet on God's existence but God does not exist, you lose nothing except the time and effort spent believing. Pascal concluded through this logic that believing in God is more advantageous than not believing, from a probability standpoint.

Let us apply Pascal's idea to the debt structure of Korean society. The debt structure in Korea changed dramatically following the late 1990s Asian Financial Crisis. Before the crisis, the government and individuals had sound finances, while corporations were exposed to large-scale debt. Companies underwent painful restructuring to increase their equity ratios, and massive public funds were injected to restore the broken financial system. One reason Korea overcame the crisis quickly was its robust government finances.

Afterwards, the opposite situation unfolded. Corporations began accumulating cash, while national and household debt have been hitting record highs almost every year. Although there is controversy over the size of the national debt announced by the Ministry of Economy and Finance on the 9th for 2022, the important factor is the direction rather than the scale. Most fiscal experts agree that factors increasing Korea's national debt outweigh those that do not.

It is clear that household debt will not easily decrease anytime soon. Moreover, a significant portion of household loans is related to real estate, making them highly sensitive to interest rate changes. It is a gloomy scenario, but if interest rates surge for any reason, it is evident that there will be considerable shock.

Low birth rates and aging populations, as seen in advanced countries' experiences, pose significant burdens on national finances. Welfare costs are fixed expenses and thus difficult to reduce. If the economy continues to grow and generate ample revenue, there is no problem, but if not, a situation may arise where income is low and expenditures are high. Determining the appropriate level of national debt is beyond my expertise. From an asset management perspective, it is safer to assume, like Pascal's wager, that a crisis could come from national debt.

When national finances deteriorate and a crisis occurs, what should investors prepare? Diversifying assets through global investments would be an efficient strategy. Just as investors who diversified overseas during Japan's lost two decades fared differently from those who invested only domestically, the outcomes diverged. If a debt-related crisis does not occur, naturally there is no problem. Even if it does not happen, global diversification remains a useful strategy for investors.

Humans cannot see the future precisely. Therefore, what is needed is the mindset to envision various scenarios and consider strategies to prepare for the worst. In asset management, sometimes preparing for the worst-case scenario is more important than pursuing the best outcome. Rather than precisely calculating and predicting the scale of national or household debt, I believe that preparing for the worst and diversifying is the necessary mindset for individual investors.

Lee Sang-geon, Head of Mirae Asset Investment and Pension Center