Market Liquidity Not Flowing to Investment, Consumption

Abundant liquidity is fueling speculation in the real estate and stock markets rather than stimulating the real economy.

The volume of broad money hit an all-time high in May this year after having topped 3,000 trillion won for the first time ever in the previous month. However, the abundant liquidity is staying in the real estate and stock markets without flowing to the real economy for consumption and investment.

The Bank of Korea announced on July 15 that the volume increased 1.2 percent to 3,053.9 trillion won in May after having reached 3,018 trillion won in April. In May, the volume increased 9.9 percent year on year to show the steepest increase since October 2009. In short, the market liquidity soared by no less than 275 trillion won in just one year.

This is because the benchmark interest rate is at a record low of 0.5 percent a year and households’ and enterprises’ preference for cash is increasing due to economic uncertainties with COVID-19 still going on.


The broad money of households and non-profit organizations increased 15.1 trillion won in a month. Likewise, that of enterprises increased 14.6 trillion won. Those of financial institutions and others rose by seven trillion won and 2.9 trillion won, respectively. Demand deposits showed an increase of 15.7 trillion won while money market funds and savings deposits increased 10.9 trillion won and 10.4 trillion won, respectively. On the other hand, two-year or shorter time deposits and installment savings decreased 7.9 trillion won with the deposit interest rate falling.

The problem is that asset markets are absorbing most of the abundant liquidity. With COVID-19 hindering consumption activities, the money is flocking to the stock and real estate markets, where transactions require little or no physical contact.


 

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