Snip ~ "While Washington is again hurting the Korean economy by not ratifying the already-signed free-trade agreement between the two, Seoul could also pursue a greater degree of unilateral liberalization. Surely mounting inflation might offer some political cover to politicians attempting such a feat"September 6, 2011
The inflationary costs of a cheap currency hit Korea
Is anyone really surprised inflation in South Korea has hit a three-year high? They shouldn't be. Seoul is, like so many other East Asian governments, in large part a victim of economic policies hatched in Washington. Yet Korean policy makers seem to be doing everything they can to make their monetary problems worse.
The government was quick to blame last week's price-rise data—up 5.3% for August compared to the same month last year—on that old inflationary whipping boy, the weather. Summer flooding supposedly depressed agriculture supplies and pushed food prices higher. Perhaps that even explains part of it.
But alarm bells also should be ringing over energy prices. The consumer inflation data included increases of between 2% and 10% on various oil and gas products as the government scales back increasingly unaffordable subsidies. No Korean oil fields were flooded since there aren't any Korean oil fields to flood. Clearly something bigger than Mother Nature is afoot.
Continues ..
Such as monetary policy, both in the U.S. and in Korea. Korea has been hit by the same dollar tidal wave the Federal Reserve has unleashed on the rest of the world. These inflows have caused inflation spikes all over, with consumer price rises of nearly 4.5% in Thailand, more than 3% in Malaysia, above 5% in Singapore and so forth in recent months. A weak-dollar policy out of Washington inevitably strains everyone else in what still is the Asian dollar bloc.
Korea, however, has managed to make matters worse by attempting a form of competitive devaluation of the won on the sly. Dollar inflows have also sparked currency appreciations in most corners of Asia, with the yen (up 17.5% vis-à-vis the dollar since January 2010), Singapore dollar (14%) and Thai baht (10%) leading the pack.
But in Seoul, the central bank has refrained from raising interest rates that are still negative after accounting for inflation, despite unsustainably robust growth and mounting evidence of rising prices. Data on foreign-exchange reserve accumulation over the past two years also suggest the government may be quietly buying dollars and selling won, although the government denies this.
This strategy, aimed at averting a won appreciation, appears to be working. At 8.4%, the won has seen the slowest appreciation against the dollar of any East Asian currency. This is, if not an outright competitive devaluation, certainly a competitive slower appreciation.
The inflationary costs of a cheap currency hit Korea
Is anyone really surprised inflation in South Korea has hit a three-year high? They shouldn't be. Seoul is, like so many other East Asian governments, in large part a victim of economic policies hatched in Washington. Yet Korean policy makers seem to be doing everything they can to make their monetary problems worse.
The government was quick to blame last week's price-rise data—up 5.3% for August compared to the same month last year—on that old inflationary whipping boy, the weather. Summer flooding supposedly depressed agriculture supplies and pushed food prices higher. Perhaps that even explains part of it.
But alarm bells also should be ringing over energy prices. The consumer inflation data included increases of between 2% and 10% on various oil and gas products as the government scales back increasingly unaffordable subsidies. No Korean oil fields were flooded since there aren't any Korean oil fields to flood. Clearly something bigger than Mother Nature is afoot.
Continues ..
Such as monetary policy, both in the U.S. and in Korea. Korea has been hit by the same dollar tidal wave the Federal Reserve has unleashed on the rest of the world. These inflows have caused inflation spikes all over, with consumer price rises of nearly 4.5% in Thailand, more than 3% in Malaysia, above 5% in Singapore and so forth in recent months. A weak-dollar policy out of Washington inevitably strains everyone else in what still is the Asian dollar bloc.
Korea, however, has managed to make matters worse by attempting a form of competitive devaluation of the won on the sly. Dollar inflows have also sparked currency appreciations in most corners of Asia, with the yen (up 17.5% vis-à-vis the dollar since January 2010), Singapore dollar (14%) and Thai baht (10%) leading the pack.
But in Seoul, the central bank has refrained from raising interest rates that are still negative after accounting for inflation, despite unsustainably robust growth and mounting evidence of rising prices. Data on foreign-exchange reserve accumulation over the past two years also suggest the government may be quietly buying dollars and selling won, although the government denies this.
This strategy, aimed at averting a won appreciation, appears to be working. At 8.4%, the won has seen the slowest appreciation against the dollar of any East Asian currency. This is, if not an outright competitive devaluation, certainly a competitive slower appreciation.
Superficially, the strategy appears to be working. Korean exporters can claim some advantages in particular over their Japanese peers, who are saddled with both a rising yen and a sclerotic government. But the inflation data make clear that a cheap won can quickly become an expensive strategy for Korea as Koreans have to pay more of their relatively less valuable currency to buy the same goods. Low interest rates also are spurring an inflationary consumer credit bubble.
Seoul played exactly this game in 2007 and 2008, resisting tightening amid an earlier round of easy Fed dollars until inflation skyrocketed. Seoul's exit strategy at that time turned out to be a global financial crisis (plus the strategic firing of the finance minister who had presided over the won's depreciatory "overshooting"). Policy makers should be looking for a more elegant solution this time around. While there's little Seoul can do to control the Fed, Korean policy makers could do a much better job of protecting the economy from the worst of the dollar storm.
A start would be to obsess a little less about the exchange rate and use monetary policy to focus on domestic price stability. Seoul could also enhance the overall resilience of the economy to shocks such as exchange-rate fluctuations. Korea has made important steps by pursuing trade deals that will open its economy to imports. This will encourage productivity-boosting investment at home and also, over time, boost imports in a way that will mean more domestic price competition.
While Washington is again hurting the Korean economy by not ratifying the already-signed free-trade agreement between the two, Seoul could also pursue a greater degree of unilateral liberalization. Surely mounting inflation might offer some political cover to politicians attempting such a feat.
Ideally, Korea would find itself in a world in which a stable dollar provided the foundation for stable currency regimes across Asia. But since Washington has ruled out that possibility for now, it falls to Asian governments to cope as best they can. Trying to beat the U.S. at the devaluation game is a losing strategy.
http://online.wsj.com/article/SB10001424053111904537404576551643144624846.html?mod=djkeyword
Seoul played exactly this game in 2007 and 2008, resisting tightening amid an earlier round of easy Fed dollars until inflation skyrocketed. Seoul's exit strategy at that time turned out to be a global financial crisis (plus the strategic firing of the finance minister who had presided over the won's depreciatory "overshooting"). Policy makers should be looking for a more elegant solution this time around. While there's little Seoul can do to control the Fed, Korean policy makers could do a much better job of protecting the economy from the worst of the dollar storm.
A start would be to obsess a little less about the exchange rate and use monetary policy to focus on domestic price stability. Seoul could also enhance the overall resilience of the economy to shocks such as exchange-rate fluctuations. Korea has made important steps by pursuing trade deals that will open its economy to imports. This will encourage productivity-boosting investment at home and also, over time, boost imports in a way that will mean more domestic price competition.
While Washington is again hurting the Korean economy by not ratifying the already-signed free-trade agreement between the two, Seoul could also pursue a greater degree of unilateral liberalization. Surely mounting inflation might offer some political cover to politicians attempting such a feat.
Ideally, Korea would find itself in a world in which a stable dollar provided the foundation for stable currency regimes across Asia. But since Washington has ruled out that possibility for now, it falls to Asian governments to cope as best they can. Trying to beat the U.S. at the devaluation game is a losing strategy.
http://online.wsj.com/article/SB10001424053111904537404576551643144624846.html?mod=djkeyword
