Money circulation stiffens

Despite the government’s various monetary policy measures including the key interest rate cut to 3 percent, money circulation is slowing more than ever in Korea, reports showed.

According to the Bank of Korea, money multiplier, the core indicator used to assess circulation levels, dropped to 21.9, it’s lowest point in the past decade.
Money multiplier is the ratio of the volume of the money and substitutes in circulation to the volume of actual money supplied by the central bank. A decrease in the index means the velocity of money circulation is decreasing.

The index is lower by 4.3 points than 26.2 in 2008 when the world economy was seeking to alleviate the credit crunch from the subprime mortgage loan crisis that began in the U.S. Money multiplier has steadily tumbled since then, marking 24.4 in 2009, 24.3 in 2010 and 2011 in 2011.

Analysts point out that the Bank of Korea’s cutting of the key interest rate to 3 percent may not have a great effect unless the financial authorities are able to convince businesses and the public that the economy will be bolstered.

“Companies are more focused on getting rid of debt than investing as it is difficult to predict future economic situations at the moment. It is the same with households. If such a situation continues, it will be hard for the increase of money supply to boost the economy,” said an analyst quoted by Yonhap News.
The situation is not much different in the stock market. Investments in risky assets are falling as the international market deteriorates.

The average daily transaction in the securities market for the first ten days of this month was 3.81 trillion won, according to Korea Exchange and Korea Financial Investment Association. It is the first time in almost six years that the figure was below 4 trillion won. Insiders see the investor sentiment as even more dampened than during the world financial crisis in 2008.

Investor deposits were way over 20 trillion won as of January this year, but dropped to 16.5 trillion won as of Wednesday. Investors are instead turning to Cash Management Accounts of Money Market Funds to tie up their short-term capital, according to reports. Money in MMF increased by nearly 40 percent from 53.1 trillion won last year to 72.9 trillion won as of Wednesday.

Velocity of deposit circulation, calculated by dividing deposit payout by deposit average, marked 4.0 as of May, the same as in August 2008.

By Park Min-young (claire@heraldcorp.com)