Aaaaand here we go again. It all started a few days back when the Daily Mail - UK posted an article titled "Turkey will 'root out' speculators, adviser says, as lira plunges". The article refers to the tantrum that Turkish president Erdogan went into that day. The whole issue was that the TRY (Turkish Lira) was pretty much in free fall against any other currency since December 2016… and something had to be done about it.
THE USUAL AND NOT-SO-USUAL STUFF
What has been said:
Turkey will root out anyone found to have manipulated foreign exchange markets.
Sure. As if the FOREX market can be manipulated. It so happens that the FOREX market is so, but so big that not even Central Banks can manipulate it unless it is a concerted effort of the G7 countries and only for short periods of time. Suuuuuure. Turkey will root out… Whatever…
The puppets, and the hands which manipulate them, must be found
Right! Because, you know, all FOREX transactions are totally, completely and utterly anonymous… sure… like the Internet… like brokerage laws… like banking laws… suuuuure… it's not like the Turkish government can' just… uh…you know… subpoena the records of all those transactions… naaaaa... that's too difficult…
…there was no risk in Turkey to justify the lira being at its current levels…
Other than a shaken economy, a recent attempt at a coupe and the supine incompetence of political leaders, nope. No risk whatsoever!
I am calling on my people not to save foreign exchange under their pillows, to convert to Turkish lira.
Right! On top of having a galloping case of economic and political mismanagement, now the president also wants his people to commit financial suicide by holding liras. Of course! Silly us.
By not opening a one-week repo auction again today the central bank is continuing (veiled) monetary tightening,
Certainly! Because all the other hand, ongoing, currency manipulations from the Central Bank have so far worked sooooo well!!! And as a consequence of all those efforts the TRY has lost as much as 10 percent against the dollar since the start of 2017 alone. Of course!
Turkish economists recommend the raising of interest rates to prop-up the TRY
Which will inevitably shoot the economy in the forehead. Of course! The best medicine for a patient with a headache is decapitation! Of course!
But the president is keen to prevent the economy from slowing down too much…
As opposed to slowing down a great deal. Of course! Because slowing down the economy a little bit is good for the economy… oh… wait…
But that's OK because the Central Bank will use all its tools to counter speculative moves, including selling directly into the FOREX market…
Sure. Because this was sooooo effective in the past... Suuuuure.
The president keeps asking his people to sell foreign currency with a "sense of national mobilisation"…
WOW! That's a new spin. Get your family broke now, don't miss this chance to join the national mobilisation of all the people that are also voluntarily going broke! Sure. Nice speech. We are absolutely sure people will be selling their USD and EUR by the droves… of course…
Just take a look:
What the fuzz is all about is the old usual conundrum that Keynesianism and its modern version -Monetarism- are all about (see for example The Impossible Trinity - Or Why Mainstream Economics Sucks and Fake Money For A Fake Economy and Real Money For A Real Economy for a technical explanation). In a nutshell and because currencies are fiat (i.e. created out of thin air and by decree from the state) it is impossible to have the following three properties simultaneously:
- Stable Exchange Rates
- Free Capital Flow
- Independent Monetary Policy
But factual and physical impossibilities have never stopped politicians from attempting that feat, particularly when they have a massive spin machine at their disposal paid for… you guessed it… you!
And so at every turn of events going against them, they blame this group or that event or the other issue or somethingelse when in reality all they have to do is to look in the mirror!
THE SHORT TERM
The chart at the top represents the reason why the president threw the tantrum. The TRY was in free fall and that is bad because debasement (i.e. depreciation) helps exports (i.e. they become cheaper) but it hurts imports (i.e. they become more expensive)… which is to say local manufacturing and local prices. Not to say anything about all the economic calculations that entrepreneurs make that are upset and are now therefore useless (see for example Austrian Economics For Dummies - Economic Calculation). Basically, the economy just got shot. And the chart above seems to so indicate.
THE SHORT-ISH TERM
But if we now extend the chart further back in time (just a few months) we can see a much bigger drop. The "Other" drop. And this drop wasn't worrying at all. Of course! A drop that was about 4 times larger than the current one was OK. Of course! Silly us.
THE NOT SO SHORT TERM
But since we are going back in time, let's then take a look at the not-so-recent history of the TRY in order to gauge the effectiveness and efficiency of the political leadership in Turkey in terms of the economy. There we have:
Which clearly exhibits the resounding success that currency "management" has achieved in Turkey… oh… wait…
Nevermind… nevermind… If we take a look at the inflation rate, this will corroborate and support all the good stuff that Turkish governments have been doing, right? Let's see:Let's take a look:
BUT THE ECONOMY IS OK
Sure. And that's what matters, right? If the economy is doing OK then who cares if there is some instability in the currency, right? Let's see…
It would seem that Turkish politicians have been doing an excellent job! And no, we are not kidding!
What this chart indicates is that since 2000 Turkish people have seen their standards of living going up and up and up more or less in a linear fashion (take a look at the trend line in black). In technical terms, what we have here is the GDP per person corrected for inflation and public debt. This is so because we are only interested in the net accumulated wealth as the public debt will have to be paid off. Think of it this way, would you say that you are a rich person if you own property for 10 million EUR but have a debt of 9.900.000 EUR? Of course not. Your net wealth would be 100.000 EUR.
Yes, we know, this is not the greatest and more accurate statistic we can come up with (we could discount the money printed by the Turkish Central Bank, the influx from the EU Market and add many other corrections as we know that the GDP Keynessians Vodoo Economics, but let's not push it). For any intent and purpose this chart is eye popping. Pretty much any other politician in the world would kill to get something like that. Yes. It's that good (by comparison to other countries).
And look at this one:
This is telling us that the Turkish debt (as a percentage of the GDP) has been decreasing since roughly 2000!!!
This is proof that Keynesianism works, inflation is good and taking debt to "stimulate" the economy is very beneficial. Then, once the economy has been "stimulated" the debt must be retired slowly without disturbing the pace of the economy.
Could we have been off by soooooo much? So wrong?
Note: please see the Glossary if you are unfamiliar with certain words.