5 ms·

> The one thing that the central bank is not doing is raising interest rates. This is at the heart of the entire crisis. Okay am I missing something here? Euro

> The one thing that the central bank is not doing is raising interest rates. This is at the heart of the entire crisis. Okay am I missing something here? Europe has negative rates. The US has negative rates. But when Turkey lowers rates from 19% (!!?!!) to 14% it creates a “crisis”?

lumost 5y ago
there is a "natural" interest rate which is roughly what a lender would expect to earn when lending to a reputable borrower. The Federal Reserve/ECB may lend at a slightly lower/higher rate than this natural rate - but going far away from it leads to a crisis as the money supply becomes distorted. There is a big difference between lending at 0% when "natural" interest is .25% and lending at 14% when natural interest is 20%. If inflation is 18% you're effectively giving consumers 4% return on borrowed money, which means everyone will borrow as much money as they possibly can and use it to purchase goods.
- jbay808 5y ago
  > Lending at 14% when [...] inflation is 18% In the US, inflation is nearly at 7%, while savings accounts yield around 0.05%. Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are?
  - JumpCrisscross 5y ago
    > Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are? If you believe American inflation will remain there, yes. Few do. (Also, the Fed is tightening.)
  - lumost 5y ago
    Quite possible that the US is going down the same route Turkey is. The US has an entrenched financial system that might take an extra 6 months to enter a crises. The current belief is that the fed will manage inflation appropriately, and that the 7% headline number will vanish in a few months. Housing increasing 20% last year is a sign that the same incentive is there, getting a mortgage at 2% and then earning a free 5% interest is too good a deal to pass up.
  - skybrian 5y ago
    Yes, it is discouraging. This is a reason why fixed income investments are quite unattractive right now. But there is a lag. After many years of low inflation many people haven’t changed habits yet. We still don’t expect that much inflation.
skybrian 5y ago
High inflation and low interest rates in Turkey means that depositors there lose more money than they would if it were in Euros.
- mastax 5y ago
  Therefore people are discouraged from holding deposits, and encouraged to spend Lira - exacerbating inflation.
mghfreud 5y ago
Until last year, US and Europe was desperately trying to raise inflation. I do not remember any time in Turkish history when this was the case. Anyways, current Turkish PPI is >50% (and it will only increase in coming months.). The real interest rate in Turkey is in far negative territory compared to US and EU, where they are desperate for inflation.
- syshum 5y ago
  >> US ... was desperately trying to raise inflation. Well good news, they succeeded beyond their wildest dreams....
  - mghfreud 5y ago
    Right, but at least they said they know there is a problem and they will address it. It is not like how it is in Turkey where they said “inflation is high, let’s decrease it by printing far far more money and decreasing interest rate further”.
    - slaw 5y ago
      I am not aware that US government is going to address inflation issues. Interest rate should at least match inflation that is 6.8% and that is not going to happen.
      - skybrian 5y ago
        The Fed isn’t doing that because it’s an extreme change that would wreck the economy. Or at least, so many people believe. Why do you think you know better?
        slaw 5y ago
        I only say FED doesn’t address inflation. Not if it is good or bad.
        5y ago
financetechbro 5y ago
US does not have negative rates. Every other central bank would raise interest rates with inflation at the levels we’re seeing in turkey. They problem here is that Turkey is doing the opposite
- halpert 5y ago
  They have negative real rates.
- LatteLazy 5y ago
  The US doesn't have negative interest rates, but with inflation over 6% and rates at 1.25% that's a pretty big negative real rate...
  - dan-robertson 5y ago
    If you look at the long-term expected inflation rate based on T-bill yields, it is not so different from before (say around 2018-19 or so). I think 6% is probably an inappropriate number to use in this comparison. Though I agree it looks like negative real rates. https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE (Alternatively you could suppose we’ll have inflation at x for one year and y on average for the next 9. If that’s the case I think the data above implies x=2.22% and y=4.7%, so I still think 6% is too much but maybe not totally crazy)
    - dan-robertson 5y ago
      Ugh, x and y the wrong way round obviously.

lumost 5y ago

there is a "natural" interest rate which is roughly what a lender would expect to earn when lending to a reputable borrower. The Federal Reserve/ECB may lend at a slightly lower/higher rate than this natural rate - but going far away from it leads to a crisis as the money supply becomes distorted. There is a big difference between lending at 0% when "natural" interest is .25% and lending at 14% when natural interest is 20%. If inflation is 18% you're effectively giving consumers 4% return on borrowed money, which means everyone will borrow as much money as they possibly can and use it to purchase goods.

jbay808 5y ago
> Lending at 14% when [...] inflation is 18% In the US, inflation is nearly at 7%, while savings accounts yield around 0.05%. Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are?
- JumpCrisscross 5y ago
  > Doesn't that mean Americans are discouraged from keeping money in savings accounts about the same amount as Turks are? If you believe American inflation will remain there, yes. Few do. (Also, the Fed is tightening.)
- lumost 5y ago
  Quite possible that the US is going down the same route Turkey is. The US has an entrenched financial system that might take an extra 6 months to enter a crises. The current belief is that the fed will manage inflation appropriately, and that the 7% headline number will vanish in a few months. Housing increasing 20% last year is a sign that the same incentive is there, getting a mortgage at 2% and then earning a free 5% interest is too good a deal to pass up.
- skybrian 5y ago
  Yes, it is discouraging. This is a reason why fixed income investments are quite unattractive right now. But there is a lag. After many years of low inflation many people haven’t changed habits yet. We still don’t expect that much inflation.

skybrian 5y ago

High inflation and low interest rates in Turkey means that depositors there lose more money than they would if it were in Euros.

mastax 5y ago
Therefore people are discouraged from holding deposits, and encouraged to spend Lira - exacerbating inflation.

mghfreud 5y ago

Until last year, US and Europe was desperately trying to raise inflation. I do not remember any time in Turkish history when this was the case. Anyways, current Turkish PPI is >50% (and it will only increase in coming months.). The real interest rate in Turkey is in far negative territory compared to US and EU, where they are desperate for inflation.

syshum 5y ago
>> US ... was desperately trying to raise inflation. Well good news, they succeeded beyond their wildest dreams....
- mghfreud 5y ago
  Right, but at least they said they know there is a problem and they will address it. It is not like how it is in Turkey where they said “inflation is high, let’s decrease it by printing far far more money and decreasing interest rate further”.
  - slaw 5y ago
    I am not aware that US government is going to address inflation issues. Interest rate should at least match inflation that is 6.8% and that is not going to happen.
    - skybrian 5y ago
      The Fed isn’t doing that because it’s an extreme change that would wreck the economy. Or at least, so many people believe. Why do you think you know better?
      - slaw 5y ago
        I only say FED doesn’t address inflation. Not if it is good or bad.
        5y ago

financetechbro 5y ago

US does not have negative rates. Every other central bank would raise interest rates with inflation at the levels we’re seeing in turkey. They problem here is that Turkey is doing the opposite

halpert 5y ago
They have negative real rates.
LatteLazy 5y ago
The US doesn't have negative interest rates, but with inflation over 6% and rates at 1.25% that's a pretty big negative real rate...
- dan-robertson 5y ago
  If you look at the long-term expected inflation rate based on T-bill yields, it is not so different from before (say around 2018-19 or so). I think 6% is probably an inappropriate number to use in this comparison. Though I agree it looks like negative real rates. https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T10YIE https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE (Alternatively you could suppose we’ll have inflation at x for one year and y on average for the next 9. If that’s the case I think the data above implies x=2.22% and y=4.7%, so I still think 6% is too much but maybe not totally crazy)
  - dan-robertson 5y ago
    Ugh, x and y the wrong way round obviously.