“The ‘financial crisis’ and ‘recession’ are different. The financial crisis was a human heart attack, and the 2008 financial crisis was a heart attack when all American financial institutions collapsed. When the heart of a healthy person suddenly stopped, the market immediately collapsed. On the other hand, the economic downturn can be compared to a decline in physical condition, such as ‘I want to rest at home’ or ‘I don’t want to do anything’.”
The domestic and international economy is riding a roller coaster every day due to the aftermath of US inflation. The global economy was hit by the COVID-19 crisis 12 years after the 2008 financial crisis. Two years later, as an extension of the corona virus, the United States is paying attention to the worst inflation in more than 40 years.
Global financial instability factors such as the Russia-Ukraine war and the Chinese blockade are also prolonging. As a result, Korea, which has a large contribution to exports, is also in a situation where a series of blows is inevitable. In the midst of a recent surge in domestic prices, some even predict that the inflation rate will exceed 7%. It is also of interest to see when the price level will pass the peak and return to normal.
Shinhan Bank’s Wealth Management Group Vice President Oh Geon-young, a macroeconomic expert, recently In an interview with The Times, he said, “Recently, there are rumors that ‘consumption in the US is slowing’, so it is possible to predict that the price is going through a gradual peak. Diagnosed.
It is true that the apex theory is being raised, but he asserts that such a prospect may be negligible if the war between Russia and Ukraine continues for a long time.
The United States is facing its worst inflation in over 40 years. What is the cause?
“I would like to point out the ‘supply chain issue’ among the many factors that contribute to inflation. Many people think that the supply chain issue has intensified because of the war between Russia and Ukraine. Of course, this is an important key point. Russia is a huge oil producing country, and Russian crude oil enters Europe via Ukraine. Also, since both are wheat producing countries, it has become a very big issue for both oil and grain. However, the most important aspect to consider is the ‘time point’. The Russian-Ukraine war broke out on February 24, when the US consumer price index had already risen by nearly 7%. It is true that the war issue has acted in the direction of further exacerbating the current massive inflation, but it does not mean that war itself is the cause of all inflation.”
Was there any other root cause other than the Russia-Ukraine war?
“Before that, there were clearly various supply chain issues. First, the recession continued for too long, preventing American companies from increasing their investments much. Failure to increase investment means that supply could not be increased flexibly. The problem started when this situation met with a huge explosion of demand. The ‘explosion of demand’ can be viewed in this way. In the face of COVID-19, the United States has given a lot of subsidies and has drastically lowered interest rates through quantitative easing. Prices were also kept low. However, asset prices began to jump tremendously. Consumption exploded in the United States when four conditions overlapped: subsidies, interest rates, inflation, and asset prices. On one side, consumption exploded, while on the other side, there was insufficient capacity to supply. This is the point.”
What was the stance of the US central bank at the time?
“The Federal Reserve made a huge mistake. When inflation rose, the central bank should have responded by raising interest rates, but it did not intervene. I haven’t seen the price rise for so long, so it seems that I overlooked it with the mind that ‘it will rise and fall in moderation’. US Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell both said ‘I was wrong’. That means you underestimated inflation. Demand exploded when supply was short, and there was no central bank control, such as an appropriate rate hike to control the rising inflation, and the Russia-Ukraine war engulfed the country, creating the worst inflation in 40 years. will be.”
Has inflation passed its peak?
“The fortress ‘peak theory’ is being proposed, but it is cautious to predict. First of all, talk of ‘consumption in the US is slowing’ is coming out little by little. As subsidies ceased, interest rates and inflation rose, and asset prices fell, people began to reduce consumption little by little. In a general framework, it can be expected that prices are slowly passing the peak as consumption in the US is slowing. However, geopolitical factors such as war must also be taken into account. In March and April of this year, there was talk that inflation had passed its peak, but prices rose again to the extent that that was insignificant. First of all, it seems important when the Russian-Ukraine war will end. The apex theory is creeping in, but it could be a different story if the war lasted much longer.”
How does US inflation affect the domestic economy?
“The first is that we could face an unwanted rate hike. When US inflation rises, the Fed raises interest rates, and in this case, Korea has no choice but to raise interest rates accordingly. This is because, if the interest rate gap with the US is large, foreign investment capital will flow out and face a bigger crisis. But there is a problem. The point is that the Korean economy is not as strong as the US, so raising interest rates at the same rate as the US could have side effects. Since Korea has quite a lot of household debt, raising interest rates may increase the number of borrowers who will be hit, and the problem may escalate. Second, if the US raises interest rates, the dollar strengthens, raising import prices. Korea is a small export open economy. It means that we are greatly affected by how other countries move and how the economic flow of other countries changes. After all, the U.S. is still having a slightly greater influence on the Korean economy than China.”
How would you compare the current situation with the 2008 financial crisis?
“The biggest difference was that it was a financial crisis back then. A ‘financial crisis’ and a ‘recession’ are slightly different. A financial crisis is a human heart stoppage. On the other hand, the economic downturn can be compared to a decline in physical condition, such as ‘I want to rest at home’ or ‘I don’t want to do anything’. In 2008, all financial institutions in the United States collapsed and they suffered a heart attack. At that time, financial institutions had a lot of debt, and when the things they had invested in began to fail, it spread to a huge financial crisis. When the heart of a healthy person suddenly stopped, the market immediately collapsed. In the present case, there is no talk of ‘financial institutions collapsing immediately’, so it seems to be a bit different from the 2008 financial crisis.”
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