As Money Does Not Circulate Enough, the Economy Faces Liquidity Problems

Money, the so-called blood of the economy, is not circulating enough.

Large corporations put the money earned from booming exports into a reserve. The real estate market, in which there existed active cash flows, has become chilled now that fewer transactions are occurring. While dormant capital is piling up at banks, it is hard to find new outlets for loans.

When money does not circulate properly in an economy, the economy will experience a similar symptom that a human body will experience when blood does not circulate properly: the rankling limbs. As for the economy, the symptom is that a number of the low-income, self-employed, and small and midsize companies succumb to the brunt of the economic recession and eventually collapse.

Domestic liquidity, or M3, fell more than 50 percent to 5.1 percent during the first quarter of this year, compared to 12.1 of the same period of the previous year, the Bank of Korea said on June 9.

This quarterly increase of money supply is at its lowest since 1986, except for the second quarter of 2000 when corporations repaid their loans on a massive scale to lower the debt/equity ratio.

If adjusted for this year’s GDP growth rate and rise in prices, domestic liquidity should stand at 11.5-13.5 percent, analysts projected.

“Individuals have already used up their future income with personal loans or credit card cash advances and reached the point where they cannot borrow any more,” Kim Jae-cheon, director at the BOK’s financial market bureau. “Financially-sound large corporations don’t need loans while small and midsize corporations find it hard to get loans. Much cash cannot flow out of banks, which in turn lowers liquidity.”

While real interest rates, adjusted for tax and rises in prices, are below zero, bank savings are piling up. As of the end of March, the total amount of savings at 19 banks stands at 722.7 trillion, up 8.13 percent compared to the same period of last year.

Large corporations, which have hoarded up extra capital, do not feel the need for loans. The average interest rate for them was a historical low of 5.7 percent a year in April.

“As many transactions have been brought to a stop in the real estate market, investment in construction will be hampered, which in turn puts a further strain on cash flow,” Kim Kyung-won, assistant director of the Samsung Economic Research Institute. “The only solution is to proactively stimulate corporate investment by further easing regulations on corporations and stabilizing labor-management relations, and to encourage the rich to spend more by mollifying their anxieties.”