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"The central bank has brought so much lira with its foreign currency reserve to try to maintain the price that it is almost running dry of any foreign currency,

"The central bank has brought so much lira with its foreign currency reserve to try to maintain the price that it is almost running dry of any foreign currency, making the future look even bleaker." All it needs to do is stop doing that and make it clear to the market that it will no longer do that. That removes the patsy from the market and the currency will find its level. What you have to do is make lira scarce. And you do that by putting taxes up, stop paying interest on lira savings, and putting into administration any firm borrowing in foreign currency but earning in lira, and then refinancing them with lira loans. All of which is the precise opposite of the view suggested by the "Washington Consensus". Unfortunately Erdogan is a sound finance guy. Like Putin he thinks money is gold coins and that we're playing some D&D game. He needs to understand its about the flow of money, not the stock. People holding savings in Gold, Crypto or dollars is a benefit to the lira economy, since it means lira will flow more freely and rapidly increasing economic velocity.

imtringued 6y ago
I agree about one thing, the turkish central bank has kept inflation above 2% and real interest rates are roughly at 2%%, therefore it doesn't have to do anything anymore, it just has to wait for the market to do its own thing. Of course COVID caused massive problems that need a one time fix but Turkey is not in the position of the USA where excess corporate savings are dragging inflation down. If inflation is in the double digits, then people are simply not saving enough. The only thing the central bank needs to do to encourage saving is to keep the interest rate above inflation and it did. The Turkish government can also raise taxes to reign in inflation as you said. If inflation falls faster than the interest rates this would further encourage savings.
freddie_mercury 6y ago
Using the phrase "Washington Consensus" just indicates you're out of touch and it makes it hard to take any argument you make seriously. The Washington Consensus was on life support by the year 2002 -- that's two decades ago -- and was completely dead by 2008 -- well over a decade ago. Making strawman arguments against things 15 years out of date doesn't make your argument look stronger.
- neilwilson 6y ago
  "Using the phrase "Washington Consensus" just indicates you're out of touch and it makes it hard to take any argument you make seriously" Yet that is still how central banks operate. They are completely out of date, continuing to target inflation using interest rate movements and getting absolutely nowhere. In fact largely getting the opposite response. Everybody knows that they are making no impact, yet nobody dare point it out out of politeness. However this emperor definitely has not clothes at this stage. The central banks haven't moved on because their operational mode is still stuck in the 1990s. Eventually one will change tack - as New Zealand did before. Hope that is a Western one, not Erdogan.
- imtringued 6y ago
  Turkey is still weak economically, it has untapped investment opportunities. The USA is extremely strong, at this point the majority of investments have been tapped and we must manufacture artificial investments (infrastructure bill) just to keep macroscopic balance (savings = investments). What Turkey needs is more foreign investment (plus the trust of its citizens) and that requires eliminating corruption.
- pydry 6y ago
  What?? Since when did trade liberalization and legal security for property rights die? Did the world Bank suddenly tell us these things didnt matter after all? Or, is this a variant of the weird perpetual claim made by dyed-in-the-wool neoliberals that they actually don't exist and never did?
throwawaylololo 6y ago
> All it needs to do is stop doing that and make it clear to the market that it will no longer do that. I think that after the sack of the previous governor by Erdogan, it is clear to investors who is really running the Central Bank and what he think. For many investors the only way to make it clear that it will no longer do that is a change not in the CB, but in the Presidency. > What you have to do is make lira scarce. And you do that by putting taxes up, stop paying interest on lira savings [...] I disagree with this part. To make lira scarce you have to make it so people are willing to buy lira. If you stop paying interest on lira savings people will sell their liras and buy dollars (this is exactly what happened in the past years). On the other side if the interest rates are higher people and foreign investors will be more eager to change their dollars for lira, helping the exchange rate. Also higher rates means less people will take credit, reducing the amount of lira circulating. This was exactly was happening with the previous governor. More importantly, people will buy lira only if they trust the Turkish state and consequently the lira. Just imagine, simply by firing the previous governor (which was considered a competent person), Erdogan caused the Turkish Lira to lose about 10-15% of its value in a single night. I think that the situation will not improve much unless there are serious economic and institutional reforms, but I don't see them coming while Erdogan is still ruling the country.
- neilwilson 6y ago
  > To make lira scarce you have to make it so people are willing to buy lira. If you stop paying interest on lira savings people will sell their liras and buy dollars (this is exactly what happened in the past years). Which is what you want them to do since that puts lira back into circulation where it passes (higher) tax points which then drains the currency. Reducing government spending would do the same thing. When there is less lira in circulation, then obtaining it to purchase Turkish output becomes more difficult and the price rises. People saving in any currency is the problem since the lack of spending it represents denies somebody else an income. You don't want 'foreign investors'. Turkey has its own currency and can purchase anything available for sale in lira on its own. In fact 'foreign investors' have to obtain lira before they can buy anything so why not cut out the middleman? > More importantly, people will buy lira only if they trust the Turkish state Again a myth. People will obtain lira if Erodogan will otherwise jail them for tax evasion. The lira always has value to those with a tax liablity in lira and who are sufficiently scared of Erdogan's tax collectors.
koheripbal 6y ago
> putting into administration any firm borrowing in foreign currency but earning in lira, and then refinancing them with lira loans. This isn't really an option. No lender is going to exchange foreign denominated loans for Lira denominated loans during a currency crisis. If he really cannot get the country's finances in order, he's better off just defaulting on all the loans, and starting fresh like Russia did.
- neilwilson 6y ago
  > No lender is going to exchange foreign denominated loans for Lira denominated loans during a currency crisis. They won't get that chance. When the firm is put into administration those foreign loans will be written off, which pushes the loss home to where it belongs - people lending in dollars to entities that have unhedged income in lira. The state/local investors then buy the firm out of administration with lira loans.
  - koheripbal 6y ago
    Ok, but then you are advocating that they default on their loans and destroy their credit rating. ...which eliminates their ability to borrow money for several years. And that can have severe impacts on the trade that exists today as creditors scramble to seize Turkish assets held in foreign banks/ports/contracts. It's a much much more destructive move than what you're describing.
    - neilwilson 6y ago
      "which eliminates their ability to borrow money for several years" Not really. It's a refinancing of the firm in a new structure. That happens all the time - with huge amounts of borrowed money. Getting rid of deadweight loans and refinancing elsewhere is what administration is for, and what happens regularly. In fact freeing up collateral and sending losses abroad makes a firm more creditworthy, not less.

imtringued 6y ago

I agree about one thing, the turkish central bank has kept inflation above 2% and real interest rates are roughly at 2%%, therefore it doesn't have to do anything anymore, it just has to wait for the market to do its own thing. Of course COVID caused massive problems that need a one time fix but Turkey is not in the position of the USA where excess corporate savings are dragging inflation down. If inflation is in the double digits, then people are simply not saving enough. The only thing the central bank needs to do to encourage saving is to keep the interest rate above inflation and it did. The Turkish government can also raise taxes to reign in inflation as you said. If inflation falls faster than the interest rates this would further encourage savings.

freddie_mercury 6y ago

Using the phrase "Washington Consensus" just indicates you're out of touch and it makes it hard to take any argument you make seriously. The Washington Consensus was on life support by the year 2002 -- that's two decades ago -- and was completely dead by 2008 -- well over a decade ago. Making strawman arguments against things 15 years out of date doesn't make your argument look stronger.

neilwilson 6y ago
"Using the phrase "Washington Consensus" just indicates you're out of touch and it makes it hard to take any argument you make seriously" Yet that is still how central banks operate. They are completely out of date, continuing to target inflation using interest rate movements and getting absolutely nowhere. In fact largely getting the opposite response. Everybody knows that they are making no impact, yet nobody dare point it out out of politeness. However this emperor definitely has not clothes at this stage. The central banks haven't moved on because their operational mode is still stuck in the 1990s. Eventually one will change tack - as New Zealand did before. Hope that is a Western one, not Erdogan.
imtringued 6y ago
Turkey is still weak economically, it has untapped investment opportunities. The USA is extremely strong, at this point the majority of investments have been tapped and we must manufacture artificial investments (infrastructure bill) just to keep macroscopic balance (savings = investments). What Turkey needs is more foreign investment (plus the trust of its citizens) and that requires eliminating corruption.
pydry 6y ago
What?? Since when did trade liberalization and legal security for property rights die? Did the world Bank suddenly tell us these things didnt matter after all? Or, is this a variant of the weird perpetual claim made by dyed-in-the-wool neoliberals that they actually don't exist and never did?

throwawaylololo 6y ago

> All it needs to do is stop doing that and make it clear to the market that it will no longer do that. I think that after the sack of the previous governor by Erdogan, it is clear to investors who is really running the Central Bank and what he think. For many investors the only way to make it clear that it will no longer do that is a change not in the CB, but in the Presidency. > What you have to do is make lira scarce. And you do that by putting taxes up, stop paying interest on lira savings [...] I disagree with this part. To make lira scarce you have to make it so people are willing to buy lira. If you stop paying interest on lira savings people will sell their liras and buy dollars (this is exactly what happened in the past years). On the other side if the interest rates are higher people and foreign investors will be more eager to change their dollars for lira, helping the exchange rate. Also higher rates means less people will take credit, reducing the amount of lira circulating. This was exactly was happening with the previous governor. More importantly, people will buy lira only if they trust the Turkish state and consequently the lira. Just imagine, simply by firing the previous governor (which was considered a competent person), Erdogan caused the Turkish Lira to lose about 10-15% of its value in a single night. I think that the situation will not improve much unless there are serious economic and institutional reforms, but I don't see them coming while Erdogan is still ruling the country.

neilwilson 6y ago
> To make lira scarce you have to make it so people are willing to buy lira. If you stop paying interest on lira savings people will sell their liras and buy dollars (this is exactly what happened in the past years). Which is what you want them to do since that puts lira back into circulation where it passes (higher) tax points which then drains the currency. Reducing government spending would do the same thing. When there is less lira in circulation, then obtaining it to purchase Turkish output becomes more difficult and the price rises. People saving in any currency is the problem since the lack of spending it represents denies somebody else an income. You don't want 'foreign investors'. Turkey has its own currency and can purchase anything available for sale in lira on its own. In fact 'foreign investors' have to obtain lira before they can buy anything so why not cut out the middleman? > More importantly, people will buy lira only if they trust the Turkish state Again a myth. People will obtain lira if Erodogan will otherwise jail them for tax evasion. The lira always has value to those with a tax liablity in lira and who are sufficiently scared of Erdogan's tax collectors.

koheripbal 6y ago

> putting into administration any firm borrowing in foreign currency but earning in lira, and then refinancing them with lira loans. This isn't really an option. No lender is going to exchange foreign denominated loans for Lira denominated loans during a currency crisis. If he really cannot get the country's finances in order, he's better off just defaulting on all the loans, and starting fresh like Russia did.

neilwilson 6y ago
> No lender is going to exchange foreign denominated loans for Lira denominated loans during a currency crisis. They won't get that chance. When the firm is put into administration those foreign loans will be written off, which pushes the loss home to where it belongs - people lending in dollars to entities that have unhedged income in lira. The state/local investors then buy the firm out of administration with lira loans.
- koheripbal 6y ago
  Ok, but then you are advocating that they default on their loans and destroy their credit rating. ...which eliminates their ability to borrow money for several years. And that can have severe impacts on the trade that exists today as creditors scramble to seize Turkish assets held in foreign banks/ports/contracts. It's a much much more destructive move than what you're describing.
  - neilwilson 6y ago
    "which eliminates their ability to borrow money for several years" Not really. It's a refinancing of the firm in a new structure. That happens all the time - with huge amounts of borrowed money. Getting rid of deadweight loans and refinancing elsewhere is what administration is for, and what happens regularly. In fact freeing up collateral and sending losses abroad makes a firm more creditworthy, not less.