(EDITORIAL from the Korea Herald on April 27)

Post-crisis crisis

It may seem premature to talk about the high inflation that may or may not come
in the wake of the current economic crisis, and all the more so given that the
economy is showing nothing but flickering signs of recovery. But the warning of
high inflation cannot be taken lightly.

True, inflation poses no imminent problem. Understanding the reason is a
no-brainer: It will take time until the economy recovers its pre-crisis vigor. In
the meantime, consumers will tighten their purse strings and corporations will
withhold investments, keeping inflation at bay.
In the first quarter of this year, Korea posted a 4.3 percent fall in gross
domestic product from a year before, the worst performance since the Asian
financial meltdown a decade ago. In the final quarter of 1988, GDP plummeted 6
percent.
Nonetheless, many say the worst appears to be over, with the rapid decline in GDP
arrested. GDP inched up a miniscule 0.1 percent from the final quarter of 2008 to
the first quarter of this year. This may be one of the rare sources of
consolation for Koreans concerned about the prospects of job losses and declining
income.
Economic policymakers, however, are not deterred by the dismal first quarter
performance. They paint a rosy picture when they come up with an economic outlook
for next year. They say the nation will post a growth rate of 3-4 percent in 2010
after a 2 percent drop in GDP this year.
The Korean government is much more optimistic than the International Monetary
Fund, which has recently cut its 2009 growth outlook to 1.5 percent from its
earlier projection of 4.2 percent. But the Korean government's forecast gained
greater credence when the Paris-based Organization for Economic Cooperation and
Development recently unveiled the February composite leading indicators for its
members. The indicators showed Korea was ahead of all other OECD members in its
recovery from the current crisis.
It certainly should be welcomed if the Korean economy pulls itself out of the
crisis and posts a healthy rate of growth, as Korean economic policymakers
promise. But the flipside will be the prospects of post-crisis high inflation,
which Peer Steinbrueck, German finance minister, recently termed the "crisis
after the crisis."
He said that financing global recovery with huge amounts of debt could pave the
way for the next crisis. His concerns are shared by many economic experts,
including Prof. Allan Meltzer of Carnegie Mellon University, who warns that
inflation will be higher than it was in the 1970s.
The Korean government will have to take these warnings seriously, because it is
trying to spend its way out of the crisis, as many others are doing. Finance
Minister Yoon Jeung-hyun was right when he recently acknowledged this problem.
In his recent testimony before a parliamentary standing committee, he expressed
concerns about Korea's huge amount of cashable assets - 800 trillion won. He said
that the Korean economy was awash with excess liquidity, which was certain to
fuel an inflationary spiral once recovery gets into full swing. It is the same
with the global economy, which is also a cause for concern for the finance
minister.
Yoon's concerns were shared by Kim Jong-chang, chairman of the Financial
Supervisory Service, who said, "Once the current troubles subside and the global
financial markets stabilize, the excess liquidity will create new asset bubbles."

The Korean government and the Bank of Korea will have to prepare themselves to
start siphoning off excess liquidity at the earliest sign of inflation. They will
have to keep in mind that nothing but preparation for tightening the spigot on
spending and abandon the loose fiscal policy will be able to forestall a repeat
of the current economic disaster.
(END)