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“Why don’t we just call it The Bank of the Blue House?”

Kim Choong-soo is at it again.  The governor of the Bank of Korea, the nation’s central bank, is standing pat on interest rates.  A vast majority of economists, in Korea and outside Korea, had expected a modest increase in interest rates to fight inflation, which is one of the highest in the OECD.  The average in the OECD is 2.2%.  Korea’s inflation rate is at 4.1%.

The macroeconomics 101 solution to fighting inflation is to raise interest rates.  Clearly, Kim Choong-soo hasn’t read an undergraduate’s economics textbook in awhile.  Another problem with keeping interest rates low is that it inflates real estate prices (and hence rents).  Inflated real estate prices have been known to cause pretty bad problems to once high flying economies.  Ah, perhaps Kim Choong-soo doesn’t know much history either.  Korean banks are starting to write off bad real estate debt!  Could this be the proverbial canary in the coal mine?

Honestly,  I’m not surprised.  I said awhile ago that Kim Choong-soo is damn predictable.  The WSJ (and others) shouldn’t act so surprised.

  • http://www.biblegateway.com setnaffa

    Yep.

  • wjk, 검은 머리 외국인

    inflation was always ridiculous in South Korea, at least when I was a child. I remember we had beef rarely and mostly fish on the table. I didn’t even know how to get around the dozens of bones on the galchi until I lived in Korea for over 7 years.

  • seouldout

    It’s about exports. Higher interest rate will lead to an inflow of overseas capital which will strengthen the won which will reduce Korea’s export competitiveness.

    Re “inflation is up” and “inflation is down”, one really needs to know what is in the basket of goods that is measured, what weight, if any is assigned, etc. Given half a chance governments have the tendency to fudge the numbers. In the UK it’s this. In the US it’s this. And both are not without their detractors who believe that inflation is significantly understated. If I were Korean I’d want assurances that the CPI basket is full of goods that are used by a typical Korean today, that this basket is stable, and that this info is credible and accessible. Does anyone here know (not guess, not assume) what’s in the Korean basket?

    Re Japan’s real estate bubble and its burst: The problem wasn’t so much the crazy prices, or even the collapse, but what the gov’t and banks did in the aftermath. Mostly they kept the non-performing over-valued loans on the books when they should have been written off. This really screwed Japan.

  • devmil

    Real estate bubble is exactly the right reason Kor gov shouldn’t raise interest rates. Interesting how foreigners are clamoring for hikes in interest rates…

  • R. Elgin

    One of the problems that I keep my eye on is household debt. Sales for tickets in the performing arts have declined by up to 40% for certain acts and this is more so because people have lost much of their disposable income.
    Educational costs keep going up and account for up to half of a mother’s monthly budget though more women try to tutor their children instead of paying for a hakwon.
    The credit card problem has returned (KDJ started this) since people are trying to use card companies for loans instead of banks and for the last few years, one major bank (Shinhan) has played games with improper loans and other strange behavior for a bank.
    I have changed how I keep my money due to this precarious journey through this patch of economic icebergs. Owing money to no one is also a relief.

  • Fullslab

    devmil,
    “Interesting how foreigners are clamoring for hikes in interest rates…”
    God forbid a Korean importer “clamore for hikes” for fear of being sued(“Minerva”) by the government.

  • http://www.xanga.com/wangkon936 WangKon936

    devmil,

    That’s an extremely lame line of reasoning. Low interest rates are like giving a fat person no feeling of getting full so he keeps eating hamburgers no matter how clogged his arteries are. Eventually, you’ll tip over, croak and die.