The Golden Squeeze: How Korea’s Economy Grapples With Dollar Doubts and Domestic Fractures

Executive Summary

South Korea’s economy faces a dual reckoning: global investors’ accelerating flight from dollar-denominated assets is colliding with structural weaknesses in domestic credit markets and strained trade diplomacy. As gold prices hit record highs amid Trump-era trade policy turbulence, Seoul confronts a precarious balancing act – managing external shocks while addressing a banking sector that’s failing its SMEs and a self-employed class working 14-hour days without holidays. These converging forces reveal an economy at an inflection point, where monetary orthodoxy, trade realignments, and distributional failures threaten to compound vulnerabilities.

Global Safe Asset Scramble Meets Dollar Anxiety

The 46.55% annual surge in domestic gold prices – mirroring international markets’ sprint to $3,430/oz – signals more than routine risk aversion. NH Investment & Securities’ forecast of $3,600/oz by year-end reflects fundamental doubts about dollar hegemony as Trump’s tariff adventurism destabilizes trade norms. With China’s U.S. bond holdings down 40% from 2013 peaks, Seoul faces uncomfortable questions about its own $411 billion Treasury stash. The gold rush exposes how middle powers are reassessing reserve strategies in an era of weaponized trade policies.

CET1 Obsession Chokes Productive Credit

While banks trumpet 3.4 trillion won in April corporate loan growth, 88% flowed to large firms despite SMEs comprising 80% of loan balances. This credit misallocation stems from Basel III’s CET1 ratio becoming a perverse incentive: every 1 trillion won lent to SMEs increases risk-weighted assets 3x more than corporate loans, punishing capital buffers. With major banks clinging to 13% CET1 thresholds to enable shareholder payouts, the system prioritizes financial engineering over economic substance. The result? A 390 billion won trickle to SMEs despite their 72% share of Q2 loan demand.

Policy Responses That Miss the Mark

Seoul’s interventions reveal a pattern of treating symptoms over causes:

• Housing tax tweaks: Raising provincial low-cost housing thresholds to 200 million won ignores that 63% of franchisees can’t afford holidays, let than property
• Insurance fraud bounties: While 44 million won whistleblower rewards recovered 52 billion won, they don’t address systemic pressures fueling fraud
• Fintech window-dressing: Kakao Bank’s app engagement surge among 50-60 year-olds highlights digital divides, not financial inclusion

The Self-Employed Time Bomb

With 170,000 franchises operating sans holidays and average incomes still below pre-pandemic levels, Korea’s 5.7 million self-employed form an unstable foundation. Convenience stores – 99% operating 14+ hours daily – exemplify a brutal equilibrium where labor substitution (self-exploitation) replaces productivity gains. As SME loan delinquencies fester, banks’ CET1 myopia risks creating a doom loop: credit starvation ➔ income stagnation ➔ default risks ➔ further credit tightening.

Conclusion: A Narrowing Path to Rebalance

Korea’s economic managers must navigate three imminent shocks: 1) A gold-dollar divergence that could accelerate capital account volatility, 2) U.S. trade talks likely demanding agricultural and defense concessions, and 3) A credit system where stability metrics undermine stability itself. The solution space requires heterodox moves – perhaps SME risk-weight adjustments in Basel frameworks, or channeling gold reserves into domestic liquidity buffers. Without structural reforms, today’s golden squeeze may presage a leaden decade of stagnant productivity and geoeconomic vulnerability.