Turkey’s inflation hits 83% as Erdogan vows to keep cutting interest rates

Erdogan isn't thinking about what will help the economy. He's thinking about what will enrich his loyal flunkies and goons. A captured national media takes care of the rest.

>Remarkably, Erdogan and his cronies do not think they have made a mistake!

Imagine thinking you are Napoleon and this banker or economist tells you to stop waging war. You will think that you need to silence this busy body for your noble mission.

> Remarkably, Erdogan and his cronies do not think they have made a mistake!

This is not an Erdogan/Turkey problem. See how the BoE panicked and relaunched QE despite 10% inflation in order to rescue the bonuses of pension fund managers.

If Credit Suisse goes insolvent and threatens to take Deutsche Bank with it, I guarantee you'll see the ECB cut rates and put Pan-Eurozone QE on hyperdrive, regardless of prevailing inflation.

This is, as it always is, a human problem. If crisis A hurts everyone, but crisis B hurts your buddies worse, you're going to fix crisis B at the cost of exacerbating crisis A every time. It's how power works, everywhere.

Raising rates and creating a potential recession seems, on its surface, like the absolutely wrong way to handle an economy with inflation. And yet after 5 minutes of an economist explaining it to me, it becomes the obvious right move.

Kind of amazing that world leaders can be so foolish. And yet typing that sentence made me feel foolish.

There was a Planet Money podcast in the spring that went into this in more detail. I don't have all the details on full recollect but I think the gist was that in the past, he grew up where interest rates were too high for small business to grow or access capital. He saw these small business have to raise prices to create capital or shutdown because of no capital and has locked in this perspective. He is all in on easy money for businesses to grow is key to preventing inflation. But obviously he doesn't get the part of too much money chasing limited supply.

>Remarkably, Erdogan and his cronies do not think they have made a mistake! They continue to act as if they know better, put on a brave face, reduce rates further, and wait for their idiotic actions somehow to work, as if by magic.

He knows that worst case scenario means a bailout from the West. Turkey is a nuclear power and a key NATO ally. They will not be allowed to fail.

I'm sorry man. I recently visited turkey as a foreigner, and was shocked how far my overseas dollars went. I spoked to a Turkish taxi driver in the US, who reminisced 2007 where the lira was almost at the USD. Now you can get a full meal for $2.50 USD. I spent a night at a 5 star hotel in Istanbul, for the same price as a capsule hotel in Tel Aviv.

A lot of foreigners will think 'oh boy cheap holiday' seeing this news, but really it should make their stomachs turn. The common people suffer over such a frustratingly avoidable problem.

How much would e.g. an iPhone 14 be in percentage terms of typical middle class income in Turkey? Just to give us an idea of typical electronics that we often take for granted.

"I really don't understand how these crackpots keep ending up at hyperinflation as a solution to their problems."

Two major factors, I think. One, hyperinflation feels better today at the cost of feeling worse in a couple of months. This is true even when the hyperinflation starts hitting hundreds of percent per day... it's still easier to let it go for another day than to do the now Herculean-levels of work necessary to do the right thing. This is very difficult for politicians to pass up. Some others in this conversation have marveled at how bad world leaders can be with the economy, and part of that is even if they did know exactly what the right thing to do is (itself actually a questionable claim, but let's take it at face value for a moment), they're still constrained by politics. A politician who says "Hey, everyone, let's take some pain for the next six months so our next 10 years will be better!" will be right out on their ear in nothing flat. There isn't a single power center they have willing to do that, not "the people", not their generals, not their rich benefactors, not their civil servants, nobody.

Secondly, hyperinflation gives a lot of power to the people in power. Inflation creates a temporal gradient that people usually ignore because it's not that large, but in high inflation environments, the closer you are to the printing press, the richer you are. The printing press prints you fresh new "today" currency. You use it to go out and buy. But a lot of what you're buying is really priced in "yesterday" currency. The act of buying pushes up those prices again, but you got yours. It's everybody else who is dealing in newly-high prices but trying to chase them with yesterday's currency (or worse, last week's currency) who has the problem. (Currency units are not literally labeled like that, of course; they're nominally fungible. But when you have today's print, you've got more to go chase things with.) This works right up until there's nothing left, but then you end up with effectively 100% of that "nothing". I think there's a lot of people in power who find this a very appealing proposition.

(In fact I would consider this one of the major unsolved problems in practical economics, if not the major unsolved problem: How do you deal with the existence of the power to create money/currency? Historically speaking, those who have it are completely incapable of resisting the temptation to use it to benefit themselves. There is no known solution. Physical standards like gold/silver get creatively adulterated over time, fiat simply has this capability built in, barter is so fantastically unstable that it can't even progress to the point that you can ask this question. A solution may not even exist, at least with humans as we know them now.)

Yes.

Hopefully, crackpots and ideologues in other other countries will take note of what's happening in Turkey and avoid the same horrific mistakes.

> In Zimbabwe, which has followed the World Bank and IMF process, interest rates are 200% and inflation back at 280%.

> There comes a point when we have to accept that interest rates don't really have that much power to control inflation in the real world. It's a religious devotion to a theoretical model.

I don't understand how Zimbabwe's experience is a refutation of the 'theoretical model'.

The model says that having nominal interest rates lower than the rate of inflation increases demand for loans, which increases the money supply, which increases inflation. If Zimbabwe's interest rate is 200% while inflation is 280%, then the model says inflation should continue to increase. Which is what it is doing.

The IMF process is to keep rates above inflation. So it seems Zimbabwe have some more hiking to do

As a person living in Turkey, yes it's really, REALLY horrible

May or may not be much fodder for the research papers. We've done this so many times before that there's really just nothing left to study/learn beyond coloring in the picture of misery with higher resolution.

We've known for at least a century (really, about two) exactly how this works. It's just that people are stupid and they keep asking for it again and again.

As the consultants say, it depends.

>> horrible for people living through it: 150%+ yoy increase

Is good for people paying off mortgage loan on their house.

>> strong argument for independent central bankers.

Create a money supply algorithm to do it, and avoid the hilarious pomp and circumstance of the banker meetings.

> A strong argument for independent central bankers.

It's a weird sort of thing. At one level it's easy, just elect politicians who respect independent central banks. But it's the politicians from whom the central banks are independent, so can they really be independent if their independence depends on the people who they're independent from?

Erdogan started his career with relatively independent central bankers, but since they made decisions he didn't like, he replaced them with cronies. Erdogan was also able to change the constitution to reflect his preferences, so it isn't an argument for entrenched independent central bankers either - a person who can get the constitution changed, but who doesn't get rid of the independence of the central bank is choosing that.

We can go back and say it's an argument for electing politicians who respect the independence of central banks, but it's something like an argument that says we should elect good economic managers: if you could reliably get good economic managers, it doesn't matter if you have independent central banks, and it doesn't matter if you have independent central banks if you have bad economic managers. And on the other hand, most voters just aren't going to consider the independence of central banks when voting.

With Erdogan, it doesn't matter how the economic management is structured: you're going to get low interest rates and high inflation rates and generally spook the market. Your goal has to be not to get Erdogan, over and above any argument for central bank independence.

Really, all we're left with is the political position that good economic management is better with central bank independence - a position Erdogan fundamentally disagrees with.

It's all the same with Pierre Poilievre in Canada (currently leader of the Conservative Party and the Official Opposition), who stated he wanted to fire the chair of the Bank of Canada because he didn't agree with their decisions. Once you do that, you don't have an independent central bank any more. So the only way for Canada to retain central bank independence is not to vote for Poilievre. But in Canada as in Turkiye, the central bank's independence from politicians would be dependent on politicians i.e. there wouldn't actually be central bank independence.

At the end of the day, "central bank independence" only exists if major political players in government and opposition agrees to it. Surely they should look at this lesson, and I think the lesson of recent weeks in the UK too. They both tell you that governments are up against limitations in what they can do and that the governments who respect those constraints will govern their countries better than the ones who don't, even when they make stupid decisions.

I think I would be greatly relieved if there was a different phrase, one that tells you what we mean, rather than something that is impossible at the time it is most needed.

He literally believes that inflation is caused by high interest rates, because he thinks that the Quran says so. [0] This is a common belief among a certain crazy subset of islamic economics, but to be clear, is not mainstream belief among Muslims.

[0]: https://www.spectator.co.uk/article/islamonomics-how-erdogan...

Not sure, this came up in a odd lots podcast. You can find it by searching Understanding Turkey’s Bold Plan to Stabilize the Lira.

It was 10 months ago but the basic idea, I think is that they are trying to get Turks to hold lira instead of dollars.

Also its important to keep in mind that the typical central bank and economy dynamics that everyone has in their head typically is theories and dynamics mostly focused on the US and their market and there are axioms there that might not be true in the Turkish economy.

Now I am not saying that what they are doing is going to work or its good. Just reminding everyone that what holds true for the Fed is not necessarily true for every other central bank.

My personal opinion is that their plan is probably not working and they are trying to postpone the recession to after the elections.

According to Erdogan, it is not about economics. He says that is is following Islamic teaching. Technically any interest being charged is haram.

> “What is it? We are lowering interest rates. Don’t expect anything else from me,” Erdogan said Sunday in televised comments from Istanbul. “As a Muslim, I’ll continue to do what is required by nas,” he said, using an Arabic word used in Turkish to refer to Islamic teachings.

https://www.bloomberg.com/news/articles/2021-12-19/turkey-s-...

You may be interested in reading about the history of the quantity theory of money, particularly the disputes about it in the 19th century.

In particular, the British "Banking School" was opposed to the quantity theory of the "Currency School". The Banking School claimed that inflation was cost driven, that interest rates were one of the costs of doing business, so that raising rates would increase costs which would increase prices.

While superficially reasonable, this argument was destroyed Wicksell [1] who provided a more careful economic model which made it clear that rate-driven cost-push inflation was not at all plausible as a sustained cause of inflation.

[1] https://www.richmondfed.org/-/media/richmondfedorg/publicati...

If you are supply-constrained, cheaper credit would help to build newer capacity to increase the supply, therefore, lower the inflation.

Prior to the 17th century there was never any interest on sovereign debt. It was the personal debt of the sovereign, imposed upon the ruling class and died with the sovereign.

Paying interest on sovereign debt is a relatively recent invention that came about with the rise of banks.

If you're Islamic then paying interest remains a sin. That is what Erdogan is following.

Having said that paying interest on sovereign debt is, effectively, a basic income for people who have money. Getting rid of it is a tax on rich people with savings.

However if you do that, then you have to set government taxation and spending policies for a Full Liquidity model of an economy, not a Full Funding model of an economy.

Erdogan has not done that. Other than interest he is still Chicago School from what I can tell. And that way leads to disaster.

what makes us think he wants to lower inflation? afaik his plan is to boost exports

When a country’s inflation rate hits 83% I feel like the conventional wisdom of raising interest rates to match or exceed the inflation rate won’t work. They’ve already lost control of the situation.

I think the general meta-argument "if this thing didn't work why would someone do it?" just doesn't really work. It's at best a way to identify curious decisions.

Turkey’s problems goes further than a simple interest rate increase.

Even if they increased the interest rates, they would still have substantial inflation.

Truth to be told I don’t think such third world economies can ever recover. It is too late for the patient.

Even more insane is Erdogan is demanding Turkish Airlines rebrand themselves. It’s heartbreaking to see the hard work of everyone at Turkish Airlines wasted by such a strange decision. It’s probably Turkey’s most recognizable brands and extremely well respected internationally.

I could take that complaining seriously if English had single unified spelling system, but as you do each world different anyway, I don't think it is too much to ask to throw some umlauts there and adopt the official spelling.

I agree, but it's not as simple as that: https://en.wikipedia.org/wiki/Turkey#Official_name_change

I think it's weird that newspapers use it. The UN is a different thing, there are a bunch of official country names that are not colloquially used, but ultimately people will gravitate to call them the same name they ve been using for centuries. It's not a complete name change like Ceylon -> sri lanka

Reminiscent of changing the collective English world's spelling of Kiev to Kyiv when both are just approximations of the real pronunciation, lol.

You could type Tuerkiye like Germans do for umlauts. While the rest applies, it removes the how-do-I-type-that problem.

> “Türkiye” is impossible for a native English speaker to parse - it isn’t even written in our alphabet.

That seems like a minor problem. A lot of country names are learned from exposure rather than a pure phonetic reading.

E.g. should Liechtenstein be spelt Licktenstine to make it easier for an English native to parse?

It's also editorializing the title IMO, unless CNBC has updated their title since this was posted.

Absolutely gutted that you had to witness a non-English-alphabet character on the internet today. I hope you find the inner strength to recover. Thoughts and prayers for you and your family.

99 percent of the time the top comment on this site is completely worth ignoring. This is also the case here. Typical ignorance, ignore, move along

Didn't stop a massive effort to change the English spelling and pronunciation of Kiev to the difficult to pronounce (for English speakers) Kyiv to pretend like it stuck it to Putin somehow. Along those lines next time Germany invades its neighbors we might as well adopt the Czech name for it (Nemecko, or land of the mutes) as an insult to stick it to the Krauts. Or if Hungary acts up we can use an archaic Czech name for Hungary that also means land of the pimples (Uhersko). I get the feeling Czechs didn't like their neighbors much.

What part of Turkey's ballooning inflation indicates that he is right? So far, everything has pointed to him being wrong.

has anyone basing economics on religion been right before?

Nobody claims that real currencies are immune to loss of utility as a store of value.

>else citizens of this country might preserve their liquid wealth as things go pear shaped.

To buy cryptocurrencies they need to transfer their money to someone in exchange for crypto. They can transfer that money into another fiat currency or some other financial instrument. None of which would easily let you buy food. Of course, if you tried doing this at scale the government would find a reason to arrest everyone for it and then confiscate their wealth.

I've always looked at cryptocurrencies more as good alternatives to awful fiat currencies and unlikely to supplant good fiat currencies so long as those currencies are generally well-managed. You generally cite the Euro but don't forget that Bitcoin just lost like 70% of its value this summer (in addition to other cryptocurrencies losing much of their value as well), neither are immune to volatility. In this case in particular it's jaw-dropping to see just how supreme the USD is. Rising interest rates in the US to combat inflation are basically wrecking major currencies, including cryptocurrencies.

Personally I think long-term that the fiat monetary system will dissolve or be relegated to just a few countries (US for example assuming it doesn't collapse at the hands of the Republican party) and many countries (if they continue to even exist and depending on what amount of State is left over) will resort to bartering, a mix of USD and various cryptocurrencies, gold, and trading labor for commodities.

"Could never happen" is different than "has the institutional capability to prevent a single person with a bad idea from collapsing the currency".

Yeah, and why didn't turks just put their assets into USD before Erdogan came into power? Weak! /s