Saturday, September 4, 2010 | 1:14am :: Korea
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ECONOMY OPINION GOVERNMENT
North Korean revaluation - No Problemo!
Widespread protests across North Korea are 'exaggerated', says S Korean CEO
Hanopolis | 5:15pm, Thu, Jan 14, 2010 | Comments (4)
The mega currency heist of 2009 is not a problem for everyday workers, said Park Sang Kwon, 58, the South Korean chief executive officer of Pyeonghwa Motors Corp.
According to Park, reported by Bloomberg, "North Korean workers at the country’s largest carmaker are better off after last month’s currency revaluation . . . adding that reports of widespread protests at the measure are exaggerated."
In fact, his employees' spending power has risen. Although 10 won of the new currency is equivalent to 1,000 of the old currency, wages in real terms are the same.
Bloomberg said "his comments are at odds with reports from Seoul-based aid organizations and South Korean news media that the revaluation stoked demonstrations, fanned inflation and caused shortages of goods. The policy change, which removed two zeros from the face value of the won, targeted a black market that has challenged the ruling party’s control over the population."
But Park's claims appear to be based on anecdotal experience, founding his claims on "conversations with some of his almost 1,000 North Korean workers in Pyongyang and the nearby city of Nampo during two visits last month."
"They talk about how they are 100 times better off after the money exchange, how they can now buy goods they couldn’t before," Park said in an interview on Jan. 12. "He dismissed suggestions that inflation had wiped out most of the gains, without elaborating."
Over the past 17 years Park said he had visited the North 161 times.
Is Park right?
Park's assertions could be exactly on the mark but for different reasons than members of the "workers party" or the "capitalist pig" may think.
Let's analyze how monetary policy works.
Prior to the currency redenomination, inflation was probably rampant, hence the people's recourse to foreign currency for trade and savings. The central government printed money at will to pay for its expenditures. Inflation is a form of indirect tax/theft of people's savings.
When the revaluation was announced, inflation logically skyrocketed inasmuch as paper currency became nearly worthless beyond 150,000 won or 300,000 won (whichever the ceiling ultimately became); and goods dear.
Inflation makes assets dear. Hyperinflation makes assets super dear.
After the the cursing, the burning, killing and chaos, the smoke lifted and the sun shone again. And most importantly, after the great currency rip-off, the government stopped printing money. It had accomplished what it intended: confiscate the people's savings - mostly from the entrepreneurial proto-capitalist class who traded and saved their earnings. Now, stuffed with the people's money, it didn't need to print money with abandon, anymore.
Hence, the resulting monetary calm and the temporary death of inflation. The beneficiaries are government and the proles with no previous savings to speak of - and no loss to speak of during the revaluation. Thus the assertion by Park's workers that they are "100 times better off".
But of course, it had nothing to do with the so-called redenomination/revaluation and everything to do with the government's printing presses.
According to Park, reported by Bloomberg, "North Korean workers at the country’s largest carmaker are better off after last month’s currency revaluation . . . adding that reports of widespread protests at the measure are exaggerated."
In fact, his employees' spending power has risen. Although 10 won of the new currency is equivalent to 1,000 of the old currency, wages in real terms are the same.
Bloomberg said "his comments are at odds with reports from Seoul-based aid organizations and South Korean news media that the revaluation stoked demonstrations, fanned inflation and caused shortages of goods. The policy change, which removed two zeros from the face value of the won, targeted a black market that has challenged the ruling party’s control over the population."
But Park's claims appear to be based on anecdotal experience, founding his claims on "conversations with some of his almost 1,000 North Korean workers in Pyongyang and the nearby city of Nampo during two visits last month."
"They talk about how they are 100 times better off after the money exchange, how they can now buy goods they couldn’t before," Park said in an interview on Jan. 12. "He dismissed suggestions that inflation had wiped out most of the gains, without elaborating."
Over the past 17 years Park said he had visited the North 161 times.
Is Park right?
Park's assertions could be exactly on the mark but for different reasons than members of the "workers party" or the "capitalist pig" may think.
Let's analyze how monetary policy works.
Prior to the currency redenomination, inflation was probably rampant, hence the people's recourse to foreign currency for trade and savings. The central government printed money at will to pay for its expenditures. Inflation is a form of indirect tax/theft of people's savings.
When the revaluation was announced, inflation logically skyrocketed inasmuch as paper currency became nearly worthless beyond 150,000 won or 300,000 won (whichever the ceiling ultimately became); and goods dear.
Inflation makes assets dear. Hyperinflation makes assets super dear.
After the the cursing, the burning, killing and chaos, the smoke lifted and the sun shone again. And most importantly, after the great currency rip-off, the government stopped printing money. It had accomplished what it intended: confiscate the people's savings - mostly from the entrepreneurial proto-capitalist class who traded and saved their earnings. Now, stuffed with the people's money, it didn't need to print money with abandon, anymore.
Hence, the resulting monetary calm and the temporary death of inflation. The beneficiaries are government and the proles with no previous savings to speak of - and no loss to speak of during the revaluation. Thus the assertion by Park's workers that they are "100 times better off".
But of course, it had nothing to do with the so-called redenomination/revaluation and everything to do with the government's printing presses.
- Boston Fed says credit card use is reverse Robin Hood Like inflation, credit cards take from the poor and give to the rich
- North Korea food shortage, "Nothing like this has happened before" Decreased international aid and a currency redenomination that imploded North Korea's black market supply-chain has resulted in unprecedented food shortages
- Head of N Korea's finance division responsible for currency debacle allegedly shot to death last week Poor Finance Minister Pak Nam-ki, he takes the fall for bad food logistics which resulted in unprecedented starvation
- North Koreans spread leaflets calling for the end of Kim Jong-il's rule Anti- Kim Jong-il leaflets were found in North Korea believed to have been produced and distributed by North Koreans
- Seoul promises to stimulate the real estate market and abet the leeches which includes itself Property inflation benefits mainly the rich yet governments everywhere promote continual property appreciation directly or indirectly
- Private think tank tells Korea's central bank to buy gold LG Economic Research Institute urges Korea to increase its gold holdings from a pittance today to a more reasonable level as "part of crisis management efforts since its value can be kept under any changes related to the global economy and international currency systems"
- Korea: A Good Neighbor The Korean government has kicked off another national image campaign, this time promoting itself as a "good neighbor" who aspires to grow and work together with the world as well as help less fortunate nations
- Fortunately, it was a "dry typhoon" Kompasu, the first typhoon to hit Seoul in 10 years and the fourth strongest in over a century, passed over the peninsula quickly tearing down trees, paralyzing transportation and bringing heavy downpours
- Lawmaker Kang, ousted The 41-year-old Ivy League grad was expelled from the Grand National Party for his alleged sexist remarks and faces three criminal charges, including defamation and false accusation
- LG busted in Russia for software piracy For the first time in Russia, authorities have opened a criminal inquiry for using pirated software against a major foreign company... 60 computers confiscated
- Professor Nam Kwon-hee reveals 12 movable metal types he calls "Jeungdoga Type" The Jeungdoga Type is believed to precede the jikjii, the currently recognized oldest manuscript printed with movable metal type, by at least 138 years; the professor believes the blocks match up perfectly with the characters found in the Jeungdoga manuscript
- 17 percent of Korea's elementary schools to be guarded with firearms and tear guns Crime is on the rise in the streets of Seoul; 1,000 elementary schools in Korea's most vulnerable neighborhoods will get armed security protection and around the clock video surveillance
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So those who've gone all out kicking and screaming, as reported in the news, are probably in the minority.
My question is, what happens when these underground markets start to amass savings again? The regime will have to start aggressively pursuing these markets before it creates an entire import market which circumvents the government's interference. If NK citizens get accustomed to obtaining these goods that the government cannot provide, it is there we may see the beacon of light of a capitalistic economy in the making.
Just a theory.
But it has yet been unable to do so because of sanctions by the U.S. and other U.S. influenced organizations. And unless the U.S. says, 'okay', it's nearly impossible to tap into the world banking/trading system.
Again, just a guess, but if North Koreans were routinely using foreign currencies for trade, this surely must mean the North Korean currency was being debauched by the government. Inflation must have been bad. And inflation exists not by accident - it's a creation of the government's printing presses. And why is the government running its printing presses at full steam? Because it needs money. But the printing presses are only as effective to the extent the people are using your currency. In other words, if many North Koreans are trading with yuans or dollars the North Korean government can print all it wants but it won't effect the foreign currency holders and its money printing will be muted.
This is an arcane topic but inflation is only effective to the extent there are savers. Once EVERYONE begins exchanging their NK wons for foreign currency or goods, NK wons have reached a point of worthlessness / hyperinflation. Perhaps the NK won was nearing that point.
In that case, the solution becomes to prohibit foreign currency use and force a conversion into YOUR money. This way, the government regains control of its currency, its money. It absconds with the wealth (indirectly) of savers and foreign currency holders. And with its new stash of loot, there's less need to print money.
What's important to remember is that the currency revaluation itself is not the reason behind disinflation. The NK government simply stopped printing (at least relatively). And since most North Koreans are just working stiffs and not engaging in any market trading, a clampdown on inflation is a good thing for them.
Whether the underground economy amasses wealth should be of little significance to the government as long as that wealth is kept in NK wons. Only when people begin to convert NK wons to other forms of currency should the government worry again. But people wouldn't be converting NK wons to something else if the government wasn't inflating.
Furthermore, just because the government revalued the currency neither prevents nor gives a disincentive to anyone continuing to trade or amass foreign currencies, unless it is forced by the government as you mentioned.
With or without a mandate, what prevents NKs not to trade foreign currencies again in the future if underground markets are accepting them?
Most probably did not, but more increasingly probably were. Hence the revaluation.
As of now, foreign currencies are illegal. So you can trade with yuans/dollars, but you'll do so at your own risk.
Post revaluation, if the government stops mishandling their currency, the people will have less incentive to convert. If it's true that ordinary workers are "100x better off", it looks like they've slowed down the printing presses.
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