Turkey hikes interest rate again to 45% after inflation nears 65% | Hacker News Reader

Turkey hikes interest rate again to 45% after inflation nears 65%

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65 pointsmfiguiere84 comments

So...real interest rates are -20%. That's not going to tame inflation.

I wish more laypeople understood the difference between real and nominal economic quantities. Until real rates go positive, it's profitable to borrow lots of money and use it to hoard goods, which accelerates inflation.

The numbers are too big for using that approximation.

Wont the real interest be: 1.45/1.65 => -12%

Pretty sure it's not an approximation, at least for interest rates compounded continuously. The real interest rate is simply the nominal interest rate minus inflation. The algebra is

e^(realt) = e^(nominalt) / e^(inflationt). Left side is your compounded real gains, first factor is on the right is your compounded nominal gains, and the divisor is the cumulative price rise to go from nominal to real terms.

e^(real t) = e^(nominalt - inflationt), by quotient rule for exponents.

e^(real * t) = e^(t * (nominal - inflation)), factoring out t.

real * t = t * (nominal - inflation), taking natural log of both sides

real = nominal - inflation, dividing by t

Asterisks code for italics in markdown language.[0] You can avoid this by escaping them with the backslash.

    \*example

0. https://news.ycombinator.com/formatdoc

Interest rate and inflation are usually expressed as e^(exponent * one year) - 1, so to get from 45% to the exponent you need to add one and take the logarithm, giving 0.37

Hmm ... my heads hurt doing math ... so not:

e^(real x t) = e^(nominal x t) - e^(inflation x t)

Like, you have 1$ in the bank that can buy 1 foo widget.

After a year the foo widget is 1.65$ and you have 1.45$, missing 12% of the sum you need.

I.e the same thing as having no inflation and a 12% tax.

Your definition seem to break down when "nominal - inflation" is bigger than -100%. Or what would -110% real interest mean?

> I.e the same thing as having no inflation and a 12% tax.

If we assume there is no inflation, then after one year the foo widget is still $1 [1] and you have 80¢ [2] – a 20% tax.

[1] $1.65 - $0.65 = $1.00

[2] $1.45 - $0.65 = $0.80

Turkey is trying to modulate inflation, not tame it. The goal is to attract foreign manufacturers to come an set up shop in Turkey. It's very favorable to be using $USD/$EUR to buy labor/material in Turkey right now.

Turkey however doesn't exactly have the stability, skills, or logistics necessary right now for big names to relocate. So they are likely suffering for not much gain.

It's possible to manage a dirty float without setting fire to the domestic economy, you know... In fact, investors tend to be hesitant to invest in economies that are on fire even with favourable exchange rates.

> In fact, investors tend to be hesitant to invest in economies that are on fire even with favourable exchange rates.

Hence why I don't think their plan is going to work.

Sure, but this doesn't even modulate inflation. Negative real interest rates = an incentive to take out credit = private sector monetary expansion regardless of what the central bank does. It's a positive feedback loop that doesn't stop until you get real rates positive.

> this doesn't even modulate inflation

Of course it does. To argue that making the real rate less negative doesn’t affect inflation is to imply Turkey could cut its rates to -100% nominal and not suffer any consequences.

Which is sad because that stability was there for a brief window between ~2005 and 2013.

Yep. It's a stunning fall for the Anatolian Tiger, but imo the potential is still there, and China+1 will help.

They have a fairly competitive automotive, machinery, power systems and renewables, and chemical industry, and can probably expand it further.

If they return to the same economic formula Dervis and Babacan pushed, it can get back on track.

That said, a lot of the miraculous growth from 2005-13 was because of Central Anatolia catching up. The only region that hasn't caught up yet is Eastern Anatolia, though it's getting there unless the YPG/PKK screw everything up again.

Are Turkey's materials competitive in USD/EUR right now, relative to other developing economies?

All the manufacturers have raised their prices significantly in TRY (Turkish Lira) terms- I suspect to the point that their prices are higher than usual even in USD/EUR terms.

> materials competitive in USD/EUR right now

Yes in power systems, automotive, tooling and machinery, and chemicals.

Turkish OEMs are connected with the larger CEE automotive industry, and they are a significant manufacturing of power systems components for Europe and ME. The chemical engineering industry is also fairly competitive (plastics, polymers, etc).

It's the same story for Mexico and Thailand.

A leftward shift of LM is still a leftward shift of LM.

Real rates are way below -20% and real inflation is way above 65%. An independent research institute composed of some of the top economists in Turkey, ENAG[1], puts it at over 120%

[1] https://enagrup.org/?hl=en

Well, what actually matters is the future inflation, not the past one.

So this is a complicated calculation about how bankers expect people to react to the change in the next few days.

That’s assuming salaries follow inflation, a big hypothesis.

As of the start of this year, minimum wage in Turkey is ahead of inflation.

In other words, workers at minimum wage are making more in dollar terms today than they made in dollar terms in previous years.

That doesn't say much without knowing how many people earn it. In my country, only about 4% of employees get minimal wage (because it's pretty low). What's the situation for the median worker?

A LOT of people in Turkey earn minimum wage. 50% ~ 75% of all workers.

And also a substantial amount of people who earn less than that under various legal and illegal schemes.

Unfortunately, it seems their president wasn't aware of the connection either: https://www.reuters.com/world/middle-east/erdogan-says-inter....

I think he's aware of the idea but argues aggressively against it. Apparently God will sort it all out.

Depending on your politics, spreading this understanding might have negative implications for the upcoming US election. https://fred.stlouisfed.org/series/MEHOINUSA672N

Looking back on prior eras of human history, we wonder why people accepted that the state should have the power to make gross infringements on their basic human rights, like freedom of religion, freedom of speech, and so on. In the future, humans will look back on our era and wonder why we accepted the idea that governments should have so much power to interfere with the economy.

A stable currency is a basic human right.

(deleted my previous comment)

Or people will look back and wonder why they weren't protected by their government as "the economy" failed to deliver time and time again.

Not every culture shares your libertarian fantasies. Nor do they share your specific limits on free speech (such as copyright) or your disdain for their limits (such as limit on hate speech)

Why would topics he mentioned such as "freedom of religion, freedom of speech, and so on" need to be trampled to "protect" it's people/economy from "libertarianism". Which culture hates those things?

Plenty of cultures criticize these freedoms, just differently phrased (traditional values, central role of a family, blasphemy...)

I'll word it differently: he seems very politically biased about the economy and makes it a social issue, having a dictatorship on speech and making everyone stop wrongthink or keeping copyright forever isn't going to improve GDP or economy.

You seem to think that improving GDP is a goal. Many cultures don't think that, they look at the damage from a high GDP and think that it is more important that the environment is protected. If you banned the burning of oil in the US, that would be awful for GDP, but many americans would like that.

You seem to think that the ideals of the American view of Freedom of Speech, Freedom of Religion, and ever increasing GDP, are inalienable. That's a very myopic view of the world.

We're talking about the economy so the GDP matters, not the social aspects so it does matter. Culture isn't government either. I don't think the US citizens today agree with the us government. But I don't talk about them interchangeably as you do, perhaps you could somewhat make a case for china but most cultures don't associate the citizens as one with government.

>If you banned the burning of oil in the US, that would be awful for GDP, but many americans would like that.

If I banned it, nobody would listen to me because people need to heat their homes, and get food to live. You don't get to pretend to turn off the power, lower the GPD a little and say "many Americans happy". That is fantasy.

Which cultures don’t have improving GDP, or more accurately, becoming wealthier, because GDP is just a metric to measure wealth (and an unfortunately inaccurate one at that) as a goal?

There's plenty of criticism about GDP

https://time.com/5118026/gdp-metric-success-wealth/

https://www.weforum.org/agenda/2018/11/forget-gdp-for-the-21...

And many cultures think that a few large companies getting richer while the rest of the country gets poorer is not a worthy goal. You may not think that, but given that plenty of people think GDP is terrible now.

I'm not sure how you can assert a future culture will look back and go

"In the future, humans will look back on our era and wonder why we accepted the idea that governments should have so much power to interfere with the economy"

I personally think it's much more likely they'll look back in disgust at the companies that put GDP above other factors, and the governments which didn't interfere with the economy would be the ones to blame given that many cultures today think that.

As I say, the US does not like certain speech, but it does like other speech. Some cultures do not like "freedom of religion" either. For an example which mixes them both, the US protects the Westboro Baptist Church, many cultures wouldn't.

The US criminalises people using freedom of speech to copy a movie, many cultures are quite happy with that. The US limits incitement to suicide, libel, threats, all sorts of things. US law is even at odds with what many consider US culture -- they tried banning, and there's always larges movements to ban burning a piece of cloth.

The US world view is not the only valid one. It limits speech in one way and allows it in another, same with religion.

The merger of "economy" with "people" is another world view that not everyone agrees with. The American view is generally growth and free trade should be allowed, but even America has limitations on that, and those limits go more that others in some areas and less in others.

Many cultures -- including western ones -- look at Reganomics and deregluation as something that should not be allowed despite . A future civilisation will hopefully look back at the difference between how the rich live in their penthouses and how someone sleeping rough in San Francisco and think "how terrible was america to allow this"

A currency is a tool, not a store for wealth. Stability is to be balanced against employment and economic productivity.

You can't inflation-proof purchasing power against price rises, and trying to ration out a truly fixed money supply against a growing economy creates other problems. But Turkey really has just chosen a disastrous path through Erdogan and his poor economic understanding.

(not unusual, of course, we got a tiny blip of this in the UK during the brief reign of Liz Truss, but the electorate are willing to punish that and do not prioritize culture war over economic stability. Yet.)

It doesn't really cause problems. Academic economists claim deflation is destructive, but it's a misanalysis caused by extrapolating from a tiny number of samples and ignoring all the counter evidence.

If you have a fixed monetary base and the economy grows, all that happens is that things get cheaper, which is what you'd intuitively expect if a society gets wealthier. Economists claim that this will trigger hoarding cycles but this is a strange almost pseudo-psychological claim. It doesn't happen in reality, where there are many examples of prices falling continuously over time in a sector without it causing recession within that sector.

> A stable currency is a basic human right.

This is just a complete misunderstanding of what a currency is.

Indeed.

Additionally I’m sick of people using “human right” to describe every conceivable characteristic of an ideal modern society.

Some things should be basic and a minimum and other characteristics should be add-ons you get for advancing civilization.

Pooling them all together waters down the most important ones.

I dare say 'human rights' are a list of things people agree to go for and you can make up new ones. I could back the right to a reasonably stable currency. I think it might make more sense than the right to paid holidays (UDHR article 24).

It also allows the usual culprits to reject the whole package as "western cultural imperialism" which is why you can find dictator shills load up the concept with every ridiculous western concept to the breaking point.

All rights are phrased in terms of nebulous concepts such as "religion", "speech", or "arms".

But more importantly, my statement is not about external facts. It's a statement of who I am willing to ally with and befriend. Any person who substantially agrees with me about what rights must be protected is my friend and ally. Any person who substantially disagrees is at best a neutral bystander (if he does not try to interfere with my rights) and at worst a bitter enemy (if he actively tries to suppress my rights).

M2 increased 65% YoY, maybe the should cut public spending to reduce their deficit and stop the money printer instead...

Or better: Close the central bank because politicians abuse it to spend money they don't have.

What does M2 have to do with public spending? Most of that money was created by private banks with private loans.

Edit: It's also a little hard to stop spending money when you're dealing with the fallout of this: https://en.wikipedia.org/wiki/2023_Turkey–Syria_earthquakes

> The confirmed death toll stood at 59,259: 50,783 in Turkey and 8,476 in Syria. It is the deadliest earthquake in what is now present-day Turkey since the 526 Antioch earthquake and the deadliest natural disaster in its modern history.

> the deadliest natural disaster in its modern history.

Wasn't the 2004 tsunami deadlier?

in Turkey (its) modern history.

> Wasn't the 2004 tsunami deadlier?

What tsunami hit Turkey in 2004?

from GP, emphasis mine:

> > the deadliest natural disaster in _its_ modern history.

edit: formatting

It has a multiplier effect. Government wants to spend money without raising it in taxes, forces the central bank to "loan" it money which it does via "printing" (increasing the balance of the govt at the CB accounts). The government spends the money on salaries and pensions which is then deposited into banks, which use those deposits to justify even more lending.

Turkey is odd, everyone over 40 has retired and everyone below 30 is a student. About %8 of the whole population is enrolled in a higher education institution.

The labor participation rate is among the lowest, although increasing. Many of the students and retirees are in employment as the life became harder, also the women who traditionally used to be housewives are getting close to western levels of employment.

The “everyone above 40 is retired” is not exaggerated, it’s due to some populist policies in The 90s but it spilled over once again last year when Erdoğan caved and granted right for retirement after 20 years of working(many people have retired at 38, 18 + 20).

Turkey is in a deep trouble and the central bank won’t be able to do much.

On the other hand, its location is very favorable and the Turkish politicians are masters of milking it. Also, the population is still young and being close to EU and even a candidate state with deeply integrated economy, Turkey has a great potential to actually make this system sustainable.

Also, the country is an engineering powerhouse as you might have noticed with its drones and other weapons and multiple tech Unicorns.

But at the same time its politics have become more and more Islamic as the population becomes more and more secular.

So yeah, overall Turkey is a weird place. Lots of troubles and lots of opportunities and IMHO not easy to explain with western mental models.

However, as a someone who lived in Turkey on and off, I can tell you that the country’s life quality has been deteriorating steadily and quickly for the last 10 years without a break. 90s Eastern Europe vibes.

> as the population becomes more and more secular

Source? (Not contesting. Just curious.)

Volkat Ertit is one of the popular sociologists arguing about it. Here is an article: https://www.al-monitor.com/originals/2015/03/turkey-is-getti...

You can also find videos of him explaining his findings in more details and he probably has books on it.

It's also a common theme among the islamist, they keep complaining that significant number of kids in islamic schools are actually not muslim(but theists or agnostic or something of this sort) and demand that "someone should do something".

However the more widespread theme is that lots of people are becoming "spiritual" instead of muslims or straight out atheists. They live secular lives, only say that they believe in Allah.

Here is an example, a very popular Turkish influencer who came out of an imam-hatip school: https://www.instagram.com/lucifermichaelson/

Does he look like an islamist to you? He is pretty much banking on the Andrew Tate and Dan Bilzerian style when drops some verses from the koran every now and then. He will say some verse from some holly text about the beauty of the women when coming out of the pool with few models in it.

It's a very widespread phenomenon these days to be "muslim" in the sense that you don't eat pork and wear a scarf or something and then live completely secular life otherwise. The traditional seculars are mocking this new affluential demographic as "süslüman", which is a word play on "süslü"(fancy, with a lot of ornaments ) and "müslüman" (muslim).

>"everyone above 40 is retired"

...does that mean that everyone over 40 gets a government check every month? How much is that payment (relative to say the minimum wage)? Presumably those payments not indexed to inflation? So after a couple of years of 100% real inflation, you'd need to get a job anyway?

Yes, pretty much as long as you are in the right batch. The new batch of retirees are more like 45 but on previous batches they retired even at 38 and living the sweet life. 60 year olds in Turkey are usually retired since the beginning of the Millenia.

They receive a normal pension like everybody. Currently the lowest pension is about at %60 of the minimum wedge but 10 years ago it was well above the minimum wedge. The smallest pension is 10K and the minimum wedge is 17K Turkish lira, which is something like 330USD and 560USD respectively after the latest increase of %50. Many choose to work but its complicated from legal standpoint and some companies forced the retired employees out. As Turkey ages, one can expect that ot will get much worse.

The deal is, You must have been working and paying in the social contributions for 20 years straight and be from the right batch(your first contribution must be before the end of 1999 or something like than - not sure about the exact date), so those who started working 20 years ago are all retired in the sense that they receive pension payment and all the other benefits like free healthcare without keep paying in. It's also a common practice to pay a few contributions even if you are still in school so that you can be in an early batch.

Anyway, the system was ridiculous and unsustainable so the first Erdogan government early in the 2000s changed it, only to allow one last batch to retire last year during the elections.

These people were well organised, had lawyers and NGOs and were fiercely protesting since years. They called themselves something like "Stuck at the age towards retirement". More than 2 million of them, people in their 40s and 50s demanding retirement because "they were promised" when they started working in their 20s.

The next batch, that is people who paid their first contribution after 1999, is set to retire 15 years later. Now they are getting organised too, claiming that its not OK to work 15 years just because paid their first contribution one day later.

Turkey might become the first country with Universal Basic Income since everyone wants to retire at their 40s and they are serious about it.

This is basically what president Milei of Argentina has promised to do.

Some people were arguing about bank-created money, so I went and looked up M1, and .. yeah. https://www.statista.com/statistics/1389407/turkey-money-sup...

This is a classic Zimbabwe-style money printing disaster. The other cause of inflation - devaluation against the dollar caused by weak trade - doesn't help, but the government money printing is really making it worse.

https://www.euronews.com/2022/11/09/everything-is-overheatin...

(not all inflation is money printing; analysis applies to Turkey here and should not be generalized blindly)

> This is a classic Zimbabwe-style money printing disaster.

Have you ever asked why Zimbabwe started printing money in the first place?

* https://www.huffpost.com/entry/another-look-at-the-zimba_b_7...

* https://clintballinger.com/2020/04/30/airplane-crashes-arent...

It's because the evil NATO supported a leftist protection canvas revolutionary that turned out to be a sociopathic dictator, so they had to gather colonial atrocities to calm the bad consciousness spirits ever since?

> M2 increased 65% YoY, maybe the should cut public spending to reduce their deficit and stop the money printer instead...

It's always interesting that people talk about money supply/printing as the cause of inflation, but don't go one step further as to the cause of the 'money printing' as well.

* https://www.pragcap.com/hyperinflation-its-more-than-just-a-...

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

* https://www.pragcap.com/understanding-hyperinflation/

Japan has had a constantly expanding M2, and yet its inflation rate has not only been low, but negative on more than one occasion:

* https://fred.stlouisfed.org/graph/?g=PA7P

I did. One of the primary causes of inflation is running a deficit for decades which is financed by the money printer.

As a consequence, the demand for Turkish debt is decreasing because it is getting riskier and riskier. And with this the value of the lira is going down because there is lower and lower genuine demand for the currency. And when the value of the currency goes towards 0, the prices are going towards: infinity.

Why do you think the government is trying to stop dollarization? Nobody wants lira.

Japan is an outlier and I wouldn't cite it as a general example because it is the only example. But there are hundreds of examples of inflation caused by expanding money supply.

Inflation rates as quoted by governments aren't always informative because they tend to exclude many prices that are the most affected by money printing e.g. equities.

I have no idea how inflation works - what happens if you're an average Turkish person who had, say, 1000 lira in their bank account 10 years ago?

If that 1000 lira used to be able to buy you 100 meals at 10 lira each, and now the same meal costs 100 lira, have you effectively just become 10x poorer over the past 10 years?

Does the government or your bank offer you higher savings interest on that lira as inflation rises?

Assuming the 10 year inflation rate came out to 1000% (or 26% annually) then your meal math would be correct.

As for the bank, it really depends on the accounts and products they offer. I'd imagine a Turkish bond would offer a rate of return (in lira) somewhat correlated to their central bank target rate (now 45%), but a typical savings account will always be some spread lower than that.

So, assuming constant rates for simplicity, if you got a generous 5% return on your savings account, then, after 10 years, your 1000 lira from 2014 would be worth 1000*(1.05)^10 = 1628.89 in 2024 lira. Unfortunately, those 1628.89 in 2024 lira is only worth 1628.89 / (1.26)^10 = 161.50 in 2014 lira.

The real picture is more complicated (rates go up and down, inflation in one area will be different than another and there are different ways to measure) but that is the general idea.

What people fail to appreciate is the different value of work. If you do a week's work in 1900 and make one dohicky, you get paid 100 pieces of gold and spend 50 on bed and board and save the rest

Is it fair to think that your work in 1900 for making one dohicky should be able to buy you two week's bed and board in 2000, where a new worker can make 50 dohickys instead of your one.

Get rid of inflation and you are valuing work done in the past at least as much, and probably more, than work done today, and that's stealing from today.

Think about the evil Turkish people who managed to exchange their toilet paper of a currency for Bitcoin or who did manage to acquire the barbarous relic that gold is: how scammed they've been!

Meanwhile the US went from 33 to 34 trillion in 100 days. Probably at 35 trillion now.

Turks who managed to secure dollars are also doing pretty well.

They should totally consult the talented Turkuc woman Elvira Nabiullina since it is obvious they do not know what they are doing.

The only talented human in Turkey is Erdogan, no one else can even come close to his brilliance. /s

How will this affect Turkish steam gift cards?

Asking the most important questions.

Reall inflation is much higher than 65%. A lunch takes 250 TL which we used to 100-120 TL almost 1 year ago.

Have they considered cutting public spending instead of printing money into a hyper-inflation spiral?

Isn't increasing interest rates the opposite of printing money?

Seems more like a response to printing money to try to contain the issue.

Cutting public spending will be difficult now since Turkey has already made a large part of their citizenry essentially dependent on government money either directly or indirectly, and cutting on that further would essentially doom large groups of people further under poverty line and into starvation.

Not to mention a recent earthquake caused massive damage in the eastern regions, and it will probably take years to rebuild and recover completely.

This is not to say that Turkey doesn't have frivolous public spending, it's more like the hole they've dug is so deep, that probably hardly matters at this point.

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