Flowing liquidity leading to real estate and stock market bubbles


The abundance of liquidity fuels speculation in the real estate and stock markets rather than stimulating the real economy.

The volume of broad money reached an all-time high in May this year after surpassing 3 trillion won for the first time the previous month. However, abundant liquidity remains in the real estate and stock markets without flowing into the real economy for consumption and investment.

The Bank of Korea announced on July 15 that volume rose 1.2 percent to 3.053.9 trillion won in May after reaching 3.018 trillion won in April. In May, volume rose 9.9% year on year to post the largest increase since October 2009. In short, market liquidity soared by as much as 275 trillion won in just one year.

Indeed, the benchmark interest rate is at an all-time high of 0.5% per annum and household and business preference for cash is increasing due to economic uncertainties with COVID-19 still ongoing.

The broad currency of households and nonprofits increased by 15.1 trillion won in one month. Likewise, corporate income increased by 14.6 trillion won. Those of financial institutions and others increased by 7 trillion won and 2,9 trillion won, respectively. Demand deposits increased by 15.7 trillion won, while money market funds and savings deposits increased by 10.9 trillion won and 104 trillion won, respectively. In contrast, term deposits of two years or less and installment savings declined by 7.9 trillion won as the deposit interest rate fell.

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


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