Watch the two debt bombs

The sum of government and household debts has tipped over the milestone of 3,000 trillion won ($2.26 trillion).

Kim Dong-hoThe author is the business news editor of the JoongAng Ilbo. “Borrow today and regret tomorrow” seems to be the wisdom the government and people have been living on. According to the Ministry of Economy and Finance and the Bank of Korea, the sum of government and household debts has tipped over the milestone of 3,000 trillion won ($2.26 trillion). The exact balance came to 3,042.1 trillion won by the end of June, 127 percent above the country’s nominal GDP of 2,401 trillion won last year.

What will happen if the debt surge doesn’t stop? On the national level, it will translate into chronic red ink in the fiscal balance. Southern European countries are the latest examples of this. A number of them ran into a fiscal disaster in the early 2010s after heedless populist spending to upgrade social benefits to the likes of their richer northern counterparts. Politicians vied with welfare schemes until their national coffers ran out of money.

Greece was pushed to a national default crisis due to fiscal bankruptcy. The wages of people of all ranks came down. Public pension benefits were rolled back, followed by the suspension of national healthcare coverage. Photos showed decently dressed Greeks rummaging through garbage bins in search for food. The Greek lesson was a rude awakening that there is indeed no such thing as a free lunch. A debt-financed economy is no different from a castle built on sand.

The Yoon Suk Yeol administration earns kudos for keeping to fiscal tightening for three consecutive years to contain the debt balance which stretched by more than 400 trillion won under the previous Moon Jae-in administration. Fiscal integrity is a must, not a choice, for Korea as the country lacks tourism resources like Greece or oil to sell like Venezuela.

The rationale for fiscal stimuli to kick-start the lethargic economy has some grounds. Fiscal spending serves as the priming water to fuel life into an economy in stagnation. But one-time cash handouts, like a 250,000 won paycheck to every citizen, cannot help. If cash stimuli are deemed necessary, they should selectively go to the most needy, as suggested by Gyeonggi Governor Kim Dong-yeon and former Prime Minister Kim Bu-gyeom.

Politicians must look beyond populist gimmicks. Cash giveaways won’t be needed if jobs are created — and the economy can gain impetus when companies return home after moving their manufacturing bases overseas due to stifling regulations at home. But the legislature stubbornly refuses to turn toward this direction. The bill enabling support to the economy’s pillar chip industry also has been pushed aside amid partisan divide.

Personal debt has been amassing to dangerous levels. Household debt neared 1,900 trillion won by the end of June. It has been snowballing this year amid expectations for rate lowering in Korea after a monetary shift in the United States. For instance, a newlywed in their 20s bought an apartment in Seoul for 1.5 billion won in June through a mortgage loan of 1 billion won on top of their savings of 200 million won and 300 million won gifted from their parents. As much as 6 percent of home buyers in the first half of the year borrowed more than 1 billion won.

Anyone is free to buy a home through loans for a richer lifestyle and returns in the future. But individual discretionary choices do not always serve the good of the nation. Home prices skyrocketed in Japan during the peak of the asset bubbles in 1989. Japan even lent out loans by factoring in the future appreciation of home prices. The upshot had been dear and lengthy — 30 years of economic stagnation and swarms of uninhabited homes.

Given the neglect of the legislature in lawmaking for future industrial growth, Korea is on the path to a slow-motion economy. Returns from real estate investment cannot be great, given the world’s lowest fertility rate and fastest aging pace. The construction industry projects home prices will go downhill from 2040 after the growth in single-unit households peaks out. The property myth is coming to an end. Lending excessively could be a suicidal move.

Policymakers are liable for fanning reckless lending. The central bank stopped its rate lifting at 3.5 percent while the Fed Fund rates went up to 5.5 percent. As a result, the Bank of Korea has lesser maneuvering room in monetary easing. The government has lifted loan regulations too much without considering the rate lowering cycle. It is rushing to tighten the cap on loans, but whether the belated move can undo the harm and how much it can calm the fad in leveraged home purchases cannot be known.