The Turkish Lira–Murdered by a Theory, and a Theology
The Turkish Lira has crashed, down over 50 percent since September, and now trading at less than a third of the value it had when I was in Turkey in 2018. It would be unfair to apply Jefferson Davis’ epitaph for the Confederacy: “Died of a Theory.” Instead, “Murdered by a Theory” would be more accurate.
And the murderer is readily identifiable: Turkish president Recep Tayyip Erdoğan. His theory is that high interest rates cause inflation, so as inflation accelerated and the Lira plummeted, rather than allowing the central bank to tighten monetary policy and raise interest rates, he pushed it to cut rates–which only accelerated the TRY’s crash.
Sunday, even Erdoğan apparently realized that his economic rationale was risible, so he switched gears, saying that this policy was dictated by Allah and the Koran:
“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.
Meanwhile, Erdoğan has been telling his largely religious (and poor) political base (which is being devastated by inflation) that this is just a test from Allah. That the Koran says that Allah is seeing whether you can bear such trials in silence and faith, and that if they vote for him again in 2023 he will fix inflation. Whip Inflation Then (Insallah). Or something.
So now, the Lira is being murdered by theology instead of a theory.
The chaos became extreme on Friday, with Borsa Instanbul shutting down due to a crash in Turkish shares that triggered circuit breakers. The chaos continued on the open, with the USDTRY breaching 18 and the stock market shutting down again:
Note the big rally earlier today. Though it is rather sobering that 15 is, relatively speaking, good news.
The recovery was driven by an Erdoğan statement to the cabinet today in which he pledged to defend the currency and to protect Turkish depositors against currency declines. To be honest, I find it hard to take his announcement seriously, although the markets apparently have. He has made commitments, but their credibility is dubious at best, especially since he pledged to continue his Crazy Erdo interest rate policy.
To carry through on these promises, Erdo needs dollars and Euros. Which he doesn’t have.
So I would be short the TRY at 15. Relying on a madman’s mouth writing checks that his wallet can’t cash is foolish.
There are larger lessons here.
The first is that this demonstrates the extreme dangers of presidentialism and highly personalized political systems. A “leader” with no checks and balances can indulge in insane policies at a whim. Erdoğan has gutted every institution in Turkey that could counter his ambitions–and his flights of policy fantasy. The press is suppressed, with more journalists in jail in Turkey than anywhere in the world. Civil society figures (and ordinary people) are muzzled due to the threat of being arrested for “insulting the president.” (The friend of a friend, the head of the Ataturk Institute, has been convicted of this and has the sword of Damocles hanging over his head.) The courts are packed with his goons, and the military was neutered after the abortive coup of 2016 (which in retrospect looks more and more like a false flag operation, given how it has redounded to Erdo’s benefit).
(Erdoğan’s careening into megalomania actually makes Putin look good by comparison. Russian macroeconomic policy under Putin has actually been rather responsible. Perhaps because Putin is uninterested in the subject and willing to delegate, or because he realizes that he is not especially competent in the subject. Either way, his forbearance looks wise especially in contrast to Erdoğan.)
Another lesson is that fakakta economic policies can do incredible damage in short order, yet “leaders” may recklessly implement nonetheless. In the United States, the Biden administration’s continuing attempt to spend additional trillions in the face of the worst inflation of the last 40 years is economic insanity: here the United States is at risk of dying from ignoring a theory (the fiscal theory of the price level). Even non-righties like Larry Summers realize the danger
Fortunately, a semblance of checks and balances remains in the US, and Joe Manchin has played Horatio at the Bridge, holding off BBB for now. But for how long? The specter of presidentialism hangs over the US too: Manchin is being assailed viciously by the left as a threat to “our democracy” for his temerity in resisting the president’s will–even though said president’s mental incapacity is manifest.
The US should take heed of what is going on in Turkey, and not gut checks and balances, give carte blanche to presidents, and engage in reckless economic policies. Alas, given the sway that turkeys hold in politics and the media, this may be a vain hope.
His god may be great, but either the Sultan(a)’ cannot hear its advice or it’s a crappy manager.
We shouldn’t get too cocky as there has been a lot of magical thinking on this side of the pond.
Comment by Sotos — December 20, 2021 @ 2:23 pm
A wise tweet today asked if it was possible to short the Globe.
Comment by The Pilot — December 20, 2021 @ 3:01 pm
Professor, I don’t know much about Turkish politics. Soon there will be elections in Turkey. Is there any decent candidate, who has a chance to beat Erdogan in election?
Comment by mmt — December 20, 2021 @ 3:27 pm
But, but, but … gibbering Joe promised that all his largesse would cost nothing. Nothing, I tell you.
Comment by dearieme — December 20, 2021 @ 6:23 pm
I can remember, not so long ago, when Turkey’s current account and fiscal deficits were numbered in the quadrillions of lira.
Looks like Turkey is heading back to those days.
I wonder what Brandon’s excuse for similar movements in the US dollar will be. Probably will blame it on the unvaccinated, or Putin, or gun owners, or whatever other bugbear the White House interns can dream up.
Comment by Ex-Global Super-Regulator on Lunch Break — December 20, 2021 @ 6:52 pm
@mmt–Well, my 30K foot view is that it will be hard to defeat Erdogan because the opposition is so divided. But it’s not outside the realm of possibility.
The main opposition party is the CHP–the party Ataturk founded. It’s leader is Kemal Kılıçdaroğlu. He is a rather uninspiring figure, and an Alevi to boot. (Alevi’s are a religious minority who are scorned by Muslims and officially discriminated against in Turkey.) So he is unlikely to present a real challenge to Erdo as a presidential candidate. However, recently two fairly charismatic figures have emerged. Ekrem İmamoğlu is mayor of Istanbul–Erdo’s former job–and Mansur Yavaş is mayor of Ankara. Both defeated AKP candidates in 2019.
İmamoğlu is young and appeals to CHP types (urban middle and upper class) but IMO he is a little soft and would likely fare poorly against Erdo. Yavaş is not really a CHP person. He is originally from MHP–a nationalist party currently part of a coalition with Erdo’s AKP. He left MHP because he was anti-Erdo and did not like MHP’s support for him. He is tough, is establishing a good record in Ankara, is popular there, and may have some crossover appeal to Anatolian Turks. I would make him the most credible challenger.
There are also splinter parties. One is Meral Akşener’s “Good Party.” She is also ex-MHP. Two of Erdo’s ex-ministers have also formed their own parties.
Then there is the pro-Kurdish HDP. They could potentially be important swing voters but their leadership is in jail, and further if they support candidate X the dislike (and hatred) for Kurds among many Turks could lead them to support Erdo instead of X.
So the problem is that the opposition is divided. And Turkey is divided. CHP is basically the party of Rumelian Turkey, and is dominated by urban elites who are largely despised by, and despise (frankly) poorer, Anatolian Turks. Kılıçdaroğlu is trying to build bridges but it’s uncertain whether he can do that. Yavaş would be the candidate most likely to be able to. And everybody hates the Kurds.
Erdo has a very strong base among religious low-income Turks. Despite the fact that they are being hammered particularly hard by inflation they appear to be remaining loyal, and are still responsive to Erdo’s religious appeal. It’s no accident that he has pivoted to “Allah orders low interest rates” and that he is saying that God is testing people and they have to show their faith by remaining quiet and voting for him in 2023. He’s playing the religion card for all it’s worth.
Given the social, religious, and political divisions in Turkey, and the political party divisions that reflect that, Erdo has major advantages. As long as his religious/Anatolian base remains firm, he will be hard to beat, and it’s hard to see an opposition that includes a westernized urban middle and upper class and hard-core nationalist Turks (the founder of MHP was Alparslan Türkeş, arguably a fascist and still referred to as “Başbuğ” (chieftain) by nationalist Turks) uniting behind any one challenger, especially given that Erdo will be able to play on those socio-economic-political divisions.
Hell, even the nationalists fight one another. A fight broke out last month between Ülkü Ocakları (“Grey Wolves”) and other attendees of a commemoration of Türkeş at the Alparslan Türkeş Foundation. Basically the fight was over who really is carrying on Türkeş’ legacy.
And let’s not forget, the main problem I identify in the post is not necessarily Erdo, but the presidential system he has created. Any successor would face the same lack of constraints, and could become just as unhinged and authoritarian. The real problem is a system that depends on the willingness of the president not to utilize his near-dictatorial powers to the utmost. To be honest, I don’t think that is part of the Turkish character.
Comment by cpirrong — December 20, 2021 @ 7:18 pm
@cpirrong It’s very interesting! Thanks!
Comment by mmt — December 20, 2021 @ 11:29 pm
@cpirrong It’s very interesting! Thank you!
Comment by mmt — December 20, 2021 @ 11:30 pm
@cpirrong Sorry, I accidentally made two similar comments.
Comment by mmt — December 20, 2021 @ 11:32 pm
@SWP,
Your last paragraph has particular relevance with the Manchin dust up—there’s a strong element in US politics wanting to remove or emasculate our constraints in politics. Primarily, the Democrats today, but in politicians in the extremes who can’t get their way within those constitutional constraints, so get rid of the Senate, the filibuster, Electoral College, use “emergency powers” indiscriminately, administrative state legislating instead of elected officials. Joe Manchin is today’s target, who will be next year’s target?
Comment by The Pilot — December 21, 2021 @ 9:29 am
@The Pilot. Dismantling checks and balances and creating an executive-driven/bureaucracy-driven government has been the aim of “progressives” since at least the time of Woodrow Wilson. As an academic he was a forceful expositor of that view, and pushed it as president.
Democrats’ enthusiasm for the idea waxes and wanes depending on who holds the White House. (Go figure.). But it is at the root of their governing philosophy. And as you write, they hate every check and balance, whether it be ones in the Constitution like the Electoral College and the equal representation of states in the Senate, or division of power between the federal government and the states, etc., or less formal ones like the filibuster (again, during those times they have the majority). COVID has given them an opportunity to reveal their true governing philosophy.
They are particularly crazed now because they see the handwriting on the wall and dread losing power in 2022 and 2024. So they view this as a closing window of opportunity to jam through initiatives that clearly do not command majority support.
But this mindset has existed for well over a century now. It will not go away. Even if they lose power in 2022, whenever they gain it again this progressive impulse will reassert itself.
Comment by cpirrong — December 21, 2021 @ 4:59 pm
@mmt. You’re welcome. Read the Andrews Reconstruction piece. I have a lot of thoughts. May write an entire post about it.
My view in a nutshell. Her’s is a useful corrective to the idealization of one side of Reconstruction, but doesn’t adequately address the serious sins of the other side. The venality and vengeance she highlights undermined the laudable objective of trying to provide civil rights to blacks, and provided a convenient justification for those who were trying to deprive those rights: Birth of a Nation provided an exaggerated depiction of that justification. But it cannot be denied that the opponents of black civil rights existed, fought an extended irregular war to deny those rights, and ultimately prevailed due mainly to the weariness of the North with the conflict. Reconstruction was basically a guerrilla phase of the Civil War (analogous to Iraq after the US toppling of the Hussein government in 2003), and although the guerrillas did not succeed in restoring the status quo ante, they did succeed in depriving black Americans of basic rights for almost a century.
Comment by cpirrong — December 21, 2021 @ 5:10 pm
@cpirrong Thank you so much!
Comment by mmt — December 21, 2021 @ 11:29 pm
@prof
just cancel all the western transfer payments that props Erdo up (Merkel’s refugee “deal”, NATO billions, etc.) – no more checks and balances needed…
The same goes for the progs in the US who know they have the Fed’s back…(20 percent stimulus budget deficit (bipartisan support) is not my definition of sanity either, btw.)
Putin’s economic policies are orthodox because he knows he is on his own – a matter of national security in his view (and he is right)
Comment by viennacapitalist — December 22, 2021 @ 2:02 am
For a moment there I thought you were talking about Facebook/Twitter.
Comment by Michael van der Riet — January 5, 2022 @ 2:30 am