The Federal Reserve said Wednesday it will start tapering asset purchases later this month, meaning that it would begin pulling back the stimulus it has provided through bond and mortgage purchases. Quantitative easing, which has persisted since the breakout of the COVID-19 crisis is on the brink of a huge transition with a faster-than-expected inflation spike. Economic players have to brace for liquidity drought.
The Fed announced that tapering is expected to be temporary, and it would not raise interest rates any time soon, alleviating concerns that money will rapidly dry up. Still, the Fed’s retreat from QE indicates the end of easy money to invigorate the economy. Fed Chairman Jerome Powell said that supply chain crisis would continue well into next year, and so does inflation, giving a forewarning about prolonged inflation and concomitant tightening of its monetary policy.
Household debt, which has already surpassed a critical level, may detonate the economy in the face of shrinking global liquidity. The Korea Development Institute (KDI) released a report that growth rate decreases twofold in the event of rising interest rate coupled with high debts. More debts mean more interest burden on borrowers, which will in turn lead to the slump in the real economy.
U.S. financial experts anticipate an interest rate hike in June 2022. South Korea will be compelled to increase its interest rates to stop exodus of assets, which, if realized, would throw the feverish real estate and stock markets, fueled by a lot of liquidity thus far, into an utter chaos. The number of potential sellers of assets would be inversely proportional to the demand, and people who used borrowed money to invest are likely to be overloaded by snowballing interest payment. It is time to watch out for the burst of asset market bubbles.
As the pandemic is easing, the global economy is sliding into even greater chaos. Disruption in logistics systems, high commodity prices, and increasing inflationary pressure have accumulated to the point that more money printing to support the economy is no longer viable. The economy built on overflowing liquidity and debts is not sustainable. Household and business debts should be restructured, and financial plans must be redrafted. The government should closely examine the state of finance by poor and median households and draw up a response to low economic growth.