Economy

Echoes Of The 1930s As Global Currency War Ignites

The U.S./China trade war is also sparking a currency conflict, one that brings to mind the international climate in the early years of the the Great Depression.

Battle of the bills
Battle of the bills
GUILLAUME MAUJEAN

PARIS — It hasn't been declared officially. But if you really take stock of the political atmosphere, it certainly looks like a currency war is afoot.

Donald Trump and his administration rarely miss an opportunity to lash out at the undervaluation of the Chinese currency. They accuse Beijing of artificially devaluing the yuan to counter the effects of the trade war between China and America. China along with many economists insist that these attacks on the yuan are unfounded, that the yuan is not far from its intrinsic value. But their defense doesn't matter, because the U.S. president has made his attacks on China a personal vendetta. And as a mid-term elections approach in the United States, Trump is firing off even more aggressive tweets against the Chinese regime.

While the currency war has not been stated openly, it is occurring behind closed doors. IMF member countries and G20 finance ministers met last weekend in Bali to discuss the issues and to try to remedy the damage. They admit that they are unable to solve the problem.

It was Great Britain who made the first, decisive move.

Interestingly, this dire situation reminds us of similar events — in the 1930s. In June of 1930, the United States launched hostilities on the trade front with the Hawley-Smoot Act, which increased customs duties on imports of more than 20,000 goods. Several countries launched retaliatory measures, such as trade barriers, that soon spread throughout the world economy and compounded the impact of the Great Depression.

Willis C. Hawley and Reed Smoot in April 1929 — Photo: National Photo Company

On the monetary front, it was Great Britain that made the first, decisive move, by abandoning the gold standard in September of 1931. The pound fell by 40% against the dollar. The United States and Japan responded by also abandoning convertibility. France, on the other hand, took the lead in a "gold bloc" of European countries, whose currencies became more and more overvalued.

If we compare 1930s Britain with today's China, and the "gold bloc" with the euro zone, then we get an idea of ​​the threat we currently face. Of course, the end of this story has yet to be written. But the events of the 1930s show us that trade tensions and monetary disorder are all the more dangerous when they feed on short-sighted policies and the failure of international cooperation. So here we are ... and now we wait.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
Society

Debt Trap: Why South Korean Economics Explains Squid Game

Crunching the numbers of South Korea's personal and household debt offers a glimpse into what drives the win-or-die plot of the Netflix hit produced in the Asian country.

In the Netflix series, losers of the game face death

Yip Wing Sum

-Analysis-

SEOUL — The South Korean series Squid Game has become the most viewed series on Netflix, watched by over 111 million viewers and counting. It has also generated a wave of debate online and off about its provocative message about contemporary life.

The plot follows the story of a desperate man in debt, who receives a mysterious invitation to play a game in which the contestants gamble their lives on six childhood games, with the winner awarded a prize of 45.6 billion won ($38 million)... while the losers face death.


It's a plot that many have noted is not quite as surreal as it sounds, a reflection of the reality of Korean society today mired in personal debt.

Seoul housing prices top London and New York

In the polished streets of downtown Seoul, one sees endless cards and coupons advertising loans scattered on the ground. Since the outbreak of the pandemic, as the demand for loans in South Korea has exploded, lax lending policies have led to a rapid increase in personal debt.

According to the South Korean Central Bank's "Monetary Credit Policy Report," household debt reached 105% of GDP in the first quarter of this year, equivalent to approximately $1.5 trillion at the end of March, with a major share tied up in home mortgages.

Average home loans are equivalent to 270% of annual income.

One reason behind the debts is the soaring housing prices. In Seoul, home to nearly half of the country's population, housing prices are now among the highest in the world. The price to income ratio (PIR), which weighs the average price of a home to the average annual household income, is 12.04 in Seoul, compared to 8.4 in San Francisco, 8.2 in London and 5.4 in New York.

According to the Korea Real Estate Commission, 42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s. For those in their 30s, the average amount borrowed is equivalent to 270% of their annual income.

Playing the stock market

At the same time, the South Korean stock market is booming. The increased demand to buy stocks has led to an increase in other loans such as credit. The ratio for Korean shareholders conducting credit financing, i.e. borrowing from securities companies to secure stock holdings, had reached 21.4 trillion won ($17.7 billion), further increasing the indebtedness of households.

A 30-year-old Seoul office worker who bought stocks through various forms of borrowing was interviewed by Reuters this year, and said he was "very foolish not to take advantage of the rebound."

In addition to his 100 million won ($84,000) overdraft account, he also took out a 100 million won loan against his house in Seoul, and a 50 million won stock pledge. All of these demands on the stock market have further exacerbated the problem of household debt.

42.1% of all home purchases in January 2021 were by young Koreans in their 20s and 30s

Simon Shin/SOPA Images/ZUMA

Game of survival

In response to the accumulating financial risks, the Bank of Korea has restricted the release of loans and has announced its first interest rate hike in three years at the end of August.

But experts believe that even if banks cut loans or raise interest rates, those who need money will look for other ways to borrow, often turning to more costly institutions and mechanisms.

This all risks leading to what one can call a "debt trap," one loan piling on top of another. That brings us back to the plot of Squid Game, "Either you live or I do." South Korean society has turned into a game of survival.

Keep up with the world. Break out of the bubble.
Sign up to our expressly international daily newsletter!
THE LATEST
FOCUS
TRENDING TOPICS
MOST READ