South American Trump's 'Electric Saw' Reform Catching Prices and High Interest Rates, Will It Work in the U.S.?

■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: January 16, 2025 (Thursday)
■ Dialogue: Lee Ji-hwan, CEO of Ai Asset, Professor Lee Jung-hwan of Hanyang University School of Economics and Finance

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information.
◇ Reporter Cho Tae-hyun (hereinafter Cho Tae-hyun): Let's expand your economic outlook to the world. Let's go on a trip around the world. It's time for the world economy. We have the two of you in the studio again today. First, Professor Lee Jung-hwan of Hanyang University's School of Economics and Finance is here. Please come in.

◆ Lee Jung-hwan, professor of economics and finance at Hanyang University (hereinafter referred to as Lee Jung-hwan): Yes, hello.

◇Cho Tae-hyun: And today, Lee Ji-hwan, CEO of i-Asett, who changed his role once, also came out. Please come in.

■Ji-Hwan: CEO of i Asset (hereinafter referred to as Lee Ji-Hwan): Hello.

◇ Cho Tae-hyun: There are many countries in the world that have very high base interest rates. The country we are going to visit today is Argentina. However, Argentina has a high base rate and a crazy inflation rate, but the situation seems to have improved a lot recently. What do you think?

◆ Lee Jung-hwan: Argentina's inflation rate is over 200%, we talked a lot about this. It's more than 200% as of 2023. However, the fact that it exceeds 200% means that prices have more than tripled, but looking at the indicators this time, it has doubled. The problems of these countries are that if you want to do welfare policies in the end, you need to have tax revenue, but you usually do a lot of welfare policies by increasing the fiscal deficit without tax revenue. Then, what should I do with the money is to stamp the money. There are these channels where when the country pays, it's commonly called currency, we call it monetaryists in the Milton Friedman era, and when you spend a lot of money, prices rise, and when prices rise, the real economy worsens, and prices rise again.
◇ Cho Tae-hyun: Central banks in each country are all moving according to that theory.

◆ Lee Jung-hwan: So, the purpose is different. Is releasing the currency loosening liquidity? Do banks always issue currency to reduce the value of the currency in order to implement real welfare policies? So I owe you 100 won last year because if the price more than tripled this year, you only have to pay back 30%. In fact, these countries have such effects, so you can think of them as unique countries. The IMF always comes to bail out. I got the IMF 7 times. In this regard, although the annual growth rate was minus 3.5% last year, it seems to be predicting about 5% in the fourth quarter as it increased by 4% compared to the previous quarter from the third quarter, and the stock price cannot rise if prices rise. The stock price is also up 170% now. As for the trade balance, I mentioned the financial problem earlier, I don't think refugee countries can solve it if the finances are not solved. It seems to be said that the fiscal balance was also turned into a surplus, and eventually the government reduced money and tried to catch prices, but it improved a lot.

◇ Cho Tae-hyun: There will be a base effect, but the growth rate has improved and the annual inflation rate is still in the triple digits, but it has improved a lot and there are definitely aspects that improve on the indicators. What kind of reforms did you do in the background of the electric saw President Milley's many reforms that were affected?

■ Lee Ji-hwan: Argentina's two most chronic problems – fiscal deterioration and very high inflation – came out first, and the government's tightening of finances and slimming of government organizations came out second, and the third was the omnibus policy, which is to privatize the public sector, which was actually kind of revised as the National Assembly put the brakes on it. This was originally intended to privatize public enterprises entirely, but it changed selectively. For example, the airline and urban rail sectors were changed to an optional policy in a way that public enterprises did not operate, but the data that has been released so far was quite good, as you said. But this reference point is very different from what we think, so for example, the IMF evaluated that it did a very good job. But if you look at it, this base rate was also cut by 10% last year. For the first time, I cut the base rate, and this cut the base rate from 70% to 60%. So this is a different reference point that we think of. I heard that I controlled inflation, but it's about 150% on average.

◇ Cho Tae-hyun: It went from 200% to 100%.

■ Lee Ji-hwan: But now the Milay administration has changed a little bit over a year, but there was no president in Argentina who had more than 50% approval rating while implementing this kind of reform policy. However, since it was conducted based on an approval rating of over 52% in the early days, it is still positively evaluating the IMF.

◇ Cho Tae-hyun: Anyway, the performance is coming out on the surface like this, so I think I will receive positive reviews internally or externally. President Milley's economic reforms are paying off to some extent. You mentioned monetary policy a while ago, but there was an active use of monetary policy, right?

◆Lee Jung-hwan: Actually, not only Argentina but also other South American countries have the same channels of economic crisis. It is a structure that prevents the fiscal deficit by printing money, but that means that the amount of money should be reduced. So, the more money you release to the country, the higher the price goes, so it was a mechanism like that in the past, when the Weimar Republic came out in the 1919s. If you spend a lot of money, prices go up, and if you say that prices go up, it's going to collapse into hyperinflation. This is the dollarization, so the dollar and the pack are going to move the size of the currency at the dollar level. Because currency management is no longer available within the country

◇ Cho Tae-hyun: I once made a presidential pledge called dollarization.

◆ Lee Jung-hwan: Yes, that's how we now strictly manage the volume of calls. The base rate is not the problem here. No matter how high the base rate is, if you take a lot of money, the amount of money will be released, so if the base rate is high, you have to manage the amount of money to catch the price, and if the price is set, the mechanism is different because the real economy can invest or employ with appropriate expectations. In fact, countries that control interest rates are advanced, and countries that need to control the amount of money are developing countries. So, in the 1990s, Korea also controlled the amount of money. But as it became an advanced market in the 2000s, it started to control interest rates. Interest rates are an issue because a market like this, where bonds must be traded, must be formed. Therefore, as I said, I think you can understand that we are managing the amount of money to the extent that we will link it to the dollar.

◇ Cho Tae-hyun: But this has improved the indicators. But it's been a little less than a year since President Milley took office. Under these circumstances, it was possible to lead to improvement of indicators. Then, of course, some very ready policies will come out, and this will naturally lead to side effects. Were there any side effects?

■ Lee Ji-hwan: Awesome. The resistance of the people, especially civil servants and education officials, is great right now. So, the protests are very intense right now, and President Milley is using a high-intensity inflationary pressure policy, but he also reduces the part related to pork-barrel policies and populism, and slimming down the organization. So, in the extreme, the government organization itself has been cut in half. It has been reduced from 18 ministries to 9 ministries, and there is no extension for education officials or contract officials. So many people would have been unemployed, employment would have deteriorated very badly, and the domestic economy has worsened especially now as inflation is being squeezed. So reform is good for the people, but inflation and fiscal figures have improved, but employment has deteriorated in the real economy and the domestic economy has deteriorated, so now there is some systematic resistance. In particular, while slimming down the government organization, there are a lot of protests in the government organization, especially related to civil servants, so I'm mentioning that the government organization itself is at stake. As a result, the national resistance is growing so much that it can continue to reform in this area, but the approval ratings after President Perron, which we always say most viciously, are not so bad. Therefore, in that area, there is a part where we are trying to continue to proceed with reform.

◇ Cho Tae-hyun: Okay. However, in any country, when you think of bureaucrats and public officials, there are many negative perceptions. But in fact, the role of bureaucrats is very important for the country to work well. Is it okay to reduce it like this?

◆Lee Jung-hwan: Actually, we have no choice but to reduce this. And that's what populism is all about, after all, the problem in these countries is the problem of the fiscal deficit and the problem of excessive welfare. So, since the excessive fiscal deficit that prevents people from working is a problem, the welfare must be reduced, the fiscal deficit must be reduced, and once it is stabilized, in fact, it has no choice but to come back. In fact, this is similar to a story about subsidies, but if you give subsidies, it seems to go well, but if you give them permanently, they say a lot that the industry will collapse. Welfare is good in a short period of time, but good things in this short period of time are inevitably inflation or a backlash, so you can think of these situations as slimming down. I think that if the prices I mentioned earlier fall a little faster, it will be more stable, but it's not that level yet. In fact, economic activities are not possible in countries where the price of goods suddenly doubles the next day. Then, because buying things is inevitably a priority, and dollar-based things are inevitably a priority, so it's a little difficult, but it's a country that needs structural reform.

◇ Cho Tae-hyun: Okay. We looked at Milay, the electric saw president. Some of his reforms produce results and some side effects, and we need to see what will happen. But first of all, President Milley received a lot of evaluations because he was the far-right Trump of Argentina. But there's another person who shows a bromance that's very impressed with this person. CEO Elon Musk, he seems to be benchmarking a lot of President Milley's reform plans. What do you think?

■ Lee Ji-hwan: In that regard, President Milley used this psychology very well during the election. So, some reforms, some toughness as a leader, and these parts are in line with attracting public awareness. Actually, as the professor said a while ago, Argentina has to take some extreme prescriptions, so maybe this leader has appealed to the people, and populism, as we always talked about Argentina, but as President Milley mentioned this time, officials say that in a way, they may have extreme pensions. As some kind of pork-barrel pension policy continues to come out, statistics show that there are more than 400 Argentine pensions. As a result, this extreme leader is always supported by the public in crisis situations and such performances are now delivered to the public most stimulatingly through social media, so maybe Elon Musk, Trump, and Milay will be the most popular now.

◇ Cho Tae-hyun: Looking at Elon Musk's actions these days, I feel like he loves all the far-rights around the world, but if you look at what he said. The role that Musk's government's efficiency department should play now, the economic situation in Argentina and the United States is completely different. How do you see whether applying these things to the United States is realistic or a wise decision?

■ Lee Ji-hwan: First of all, Musk talks a lot about extreme things. So if we look at the defense policy, especially when it comes to the efficiency of this government, investment in defense is extremely stupid, or if we look at the policy on the healthcare sector of pharmaceutical bio, the part that has been delayed due to the financial part is lowered into a pork-barrel policy. For example, policies such as expanding finances so that the public can have extreme access to areas such as obesity and hair loss. So, you go out of the way to attract public attention to do something that you're interested in, and eventually, this budget of government efficiency will be concentrated, so in a way, the economy and especially the financial market are fluctuating, so it's another problem to say that the other side is bad to do one side. So, it's good to do it this way, but it's always problematic to say that it's not good this way to do it, so now that such extreme policies are repeatedly coming out, everyone is only looking at Trump or Musk's mouth, so it's judged that the risks continue to exist in those areas.

◇ Cho Tae-hyun: Actually, when I look at the United States right now, I think of this word a lot. Conflict of interest Trump and Elon Musk are being discussed a lot. What's the background?

◆Lee Jung-hwan: I think Elon Musk is going to buy TikTok recently, so the business field is very broad. So, if you say it's limited to Musk, there are SpaceX and Tesla and everything. So, since we have companies in such a wide range of high-tech industries, things like industry growth can change a lot depending on these regulations and policies toward China. That's why we go to the government to regulate it, which is commonly referred to as the government, and this is done through the Ministry of Government Efficiency, but they can save the good and blow the bad.

◇ Cho Tae-hyun: According to CEO Lee just now, I think he'll do almost that.

◆Lee Jung-hwan: Since all interests are intertwined, there is no choice but to show such a tendency that the arms bend inward. So, there are certainly concerns that they may be able to do something like this, such as leaving some parts that they are good at or making a deal to lift regulations and not cut the budget. However, it's different when you meet people who work in business. These things can also show efficiency because the minds of business people and the minds of government regulators are completely different. Because the problem of each country now is that the government's productivity is not that high. Compared to investing money, social returns should be bigger, but it's the first thing that doesn't come out. Some say that because society develops so fast, things like income efficiency compared to government investment are not coming out, and there are talks about government efficiency, and there are talks about whether we should model a new model by privatizing it. So, it's both ends, but if Elon Musk does what he wants, he can use the system in a friendly way to his side by giving someone money and not giving someone money, but if the company doesn't go in, I think this company is a much faster organization, the government is a slow organization, and the government is the one with the efficiency problem.

◇ Cho Tae-hyun: But if you think about efficiency, the government's efficiency was much better than that of the private sector until the 1970s in Korea, but now it is completely reversed. In this area, I wonder if there is a need for some reform, but they are still anxious. Anyways, the professor mentioned TikTok. It's from China. There is also talk that this could be sold to Musk, but why is this talk coming out?

■Ji-Hwan Lee: The TikTok ban has continued to be tried, and if it is finally ruled, it is more likely that TikTok will be banned in the U.S. from January 19th. Then, in China, whether to withdraw from the U.S. or find another option, Musk's acquisition is still a part of his survival, but he strongly denied it on TikTok. I don't know the exact details because Musk has strongly denied it and he's silent about it, but I think it's probably the next best thing to do because I have to grab a string to survive rather than withdraw. If that happens, Musk owns X and TikTok together, the great power on social media will be formed almost exclusively. So there's a little bit of understanding about those issues, and the other thing is whether we can afford to buy TikTok financially. When we bought Twitter X, we actually invested in stocks and received loans for that part, and much of it remains as debt. In that situation, there are also concerns that the financial burden will be too great if TikTok is acquired again.

◇ Cho Tae-hyun: But I think this scenario itself is tempting for the US government, China, and Elon Musk, what do you think?

◆Lee Jung-hwan: China is in a position to sell first. And since TikTok is used a lot in the United States, getting rid of it is too problematic for the U.S. government. So, the interests are right, but the issue of the financial power you mentioned and then the monopoly that the United States hates. But TikTok has some kind of competition on Facebook and Instagram, so I think it won't go that far. There certainly seem to be problems with financing and the monopoly of what I said earlier. And the truth is, China has no choice but to sell TikTok in an accident a few times last year. So, since TikTok is in a difficult situation to operate in the United States, selling it at an appropriate price may not be bad for investors. And the U.S.-China relationship needs to recover to some extent and move in some way, and there is a high possibility that such gestures of friendship will not be bad in terms of tariff policies in the future. Personally, this is really subjective, but I personally think so.

◇ Cho Tae-hyun: Okay. Since you talked about customs duties, I'll go with customs duties. When it comes to Trump, another symbolic word, a ministry for tariffs for those who love tariffs, will be established. There are even stories like this. What kind of story is it?

■ Lee Ji-hwan: One of the biggest reasons why the financial market has been fluctuating recently is how to implement universal tariffs, which is very sharp. In fact, the financial market plunges when a full-scale implementation is carried out, whether to impose a universal tariff of 10 to 20 percent, or to negotiate a maximum of 60 percent, in the case of China, or to continue to increase gradually in accordance with the negotiations in a situation where tariffs are lowered. If it is recognized to some extent as a gradual tariff, it has been repeated for a month when the financial market recovers. That's how sensitive it is to tariffs, but whether universal tariffs can be fully implemented, this is something that we have to be very prepared for real inflation. In terms of whether to make such an irrational move, I think we will go with incremental tariffs for negotiation rather than making such an irrational move recently, so we will negotiate on a case-by-case basis, and if the results are not satisfactory there, we will continue to increase tariffs. As I tried to do this, I thought that there should be a separate organization in charge of this, so I would create a department in charge of customs duties. I think it's coming out like this. The thing that concerns us most about Trump is the super precipitation that comes out early ahead of the negotiations, which is always the most problematic. So, for example, when we negotiated defense expenses with Korea, we put forward 10 trillion won right away. But the result of the negotiations was 400 billion won. So if you look at this, no matter how strong Trump puts out in the beginning, he may not be as concerned in the market because he is a businessman and makes realistic deals anyway, but the part related to universal strength is one of the biggest reasons why countries are most vigilant and have recently undergone stock market adjustments. I think you should look at it like this.

◇ Cho Tae-hyun: Actually, I've been talking a lot about Trump on TV, but I don't think the results have ever been so against common sense. You mentioned gradual tariffs, how do you think this will actually help increase your bargaining power?

◆ Lee Jung-hwan: Actually, there are also practical problems. If the United States suddenly raises tariffs, it's directly reflected in inflation, so the United States is not a manufacturing country. Since the U.S. manufacturing industry is about 9%, it's not such a big country, so it's almost suicide to say that you're going to put tariffs on goods in a country where the manufacturing industry is not that big. However, the decision was made according to the political agenda anyway, so it is highly likely to go up step by step, and in fact, Trump is a person who has no re-election, so I predict who will coordinate these things properly. However, as you said, if we raise 2% or 3%, our agenda is 40% to 60% at any time, so there is plenty of room to be used as a bargaining chip. How to use the bargaining card well, so I think it's a system that allows us to go through negotiations with Silly, and if we didn't raise tariffs that much, but we got lower tariffs, it seems to be explained as a political agenda.

◇ Cho Tae-hyun: At this point, I'll cut off the conversation for a moment and share the breaking news that just came in. There is now news that the Bank of Korea has frozen its key interest rate at 3% per annum. Looking at what's come out now, I think there's a lot of disagreement and a lot of discussion. Anyway, I would like to inform you that it has been frozen at 3% per year. I'll look at the global economic news a little more and tell you a little more at the end. Let me point out one more thing. I think there's a big wildfire in LA right now. The damage seems to be enormous, so how much damage do you know?

■Ji-Hwan Lee: In fact, in the case of this forest fire, there are four overlapping, and it is difficult to calculate the amount of damage. Since it comes out repeatedly, the insurance relationship is actually very complicated now. So, the reinsurance companies barely got all the reinsurance related to the 3rd law. As a result, the level of resolution of existing insurance companies is also very high.

◇ Cho Tae-hyun: Could you explain a little bit about reinsurance?

■Ji-Hwan Lee: If the amount of collateral that insurance companies have to insure is so large, they re-insure it with another insurance company to lower the risk.

◇ Cho Tae-hyun: Insurers' insurance companies?

■ Lee Ji-hwan: Yes. It's an insurance company for insurers, but in the case of these LA wildfires, few insurers actually get reinsurance. Since wildfires occur repeatedly, the level that insurance companies have to cover is very high, so number one is that this will come realistically with a very heavy burden this time. The second is that L.A. is now the most rebelling area ahead of President Trump's inauguration. I'll go with my own policy. In the United States, there is also a question of whether sufficient damage compensation or restoration can be done after Trump's presidency because he said he would do a policy contrary to fiscal and economic policy. As these parts are combined, the economic damage is so great that it is difficult to calculate the damage right now, and I think it will probably have a big impact on the political sector.

◇ Cho Tae-hyun: Okay. Politically, they are fighting among themselves over the LA wildfires, so we need to watch this a little more. Regarding the base rate, once again, I would like to tell you that the Bank of Korea has frozen the base rate at 3% per year. Today, we have looked at various situations from Argentina to the United States. I was with Lee Ji-hwan, CEO of Ai Asset, and Professor Lee Jung-hwan of Hanyang University's School of Economics and Finance. Thank you for talking today.

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