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Almost all of the modern hyper inflation in countries is due to external debt in foreign currency which is usually USD. This could have been solved if interest

Almost all of the modern hyper inflation in countries is due to external debt in foreign currency which is usually USD. This could have been solved if interest rates were raised making the lira expensive. Same with Zimbabwe with projects done in USD. Sri Lanka had a project boom last 10 years with USD. This does not apply to US because the debt of US is either internal or USD. I guess partially the reason jpow is dragging his heels on raising interest rates

pmontra 4y ago
Inflation 73%? Interest rate is 14% https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en
neilwilson 4y ago
Raising interest rates just makes things worse. You’re paying people more money which they then spend to keep up with the prices. Interest/price spirals work in the same way as wage/price spirals https://new-wayland.com/blog/interest-price-spiral/ https://new-wayland.com/blog/interest-price-spiral/ Turkey is suffering from a collapse in their terms of trade. They need to stop luxury imports to make room for food and fuel. And they need to put firms with foreign borrowings through administration to get rid of the foreign debt. Ultimately though government needs to cut its spending because its capacity to tax is probably at the social limit the society can stand. It’s a mess, but neoliberalism won’t help.
- nootropicat 4y ago
  Well, Erdogan agrees with you and results are clear. The argument is wrong, mostly because even if deposit and borrow rates were equal (they aren't), central bank offers and charges it on MB, but borrow rate is in the end charged on all loans in existence - much larger than MB. 1. someone borrows (new) $100 from the central bank at the variable central bank rate - currently 0% 2. someone buys something for that $100 3. that $100 is loaned to yet another person at the variable rate 4. that person buys something with it, the buyer deposits $100 to the central bank At the end there's: $100 in the central bank. Loans for $200. Increasing the interest rate to 1% increases total liabilities by $2 after one year, but total base money only to $101. That's a deficit of $1. In other words demand for money has increased relative to the supply. This mechanism explains why more advanced economies can function with lower interest rates - because even a small base rate has a high multiplier, while in simple economies the multiplier is low. There are more implementation details in practice but the fundamental mechanism stays the same.
  - neilwilson 4y ago
    Except that isn’t how banks work and never has been has it. The BoE debunked this nonsense years ago and yet you’re still trotting it out? Why? Bankers are people - they earn the interest and spend it with firms who then pay the banks. Bank Interest is funded by paying the interest. What that means is interest is simply the wages of bankers who are paid for making collateral discounting decisions. The central bank pays reserve holders and banks create money out of nothing. Erodogan has not cut spending nor diverted the import of gold to the import of food and fuels for his population. Or done anything I suggest. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
    - nootropicat 4y ago
      That article manages to contradict itself. In one place they state "In reality, neither are reserves a binding constraint on lending," and in another "But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending", right after writing about running out of reserves, a direct contradiction. In general it's mostly correct but authors appear to be really confused, repeating statements from other sources without any understanding. A sign of how incompetent western establishment is becoming. The mechanism is very simple. Central banks lend money and that's how money is created. They do it by accepting various collateral. Whether they lend directly as debt or by purchasing assets via a reverse repo is a detail. Banks remain liquid by either holding money directly, or assets that are accepted as collateral by the central bank to generate new money instantly. Sometimes that liquidity runs out, which may then require a special central bank intervention (like relaxing collateral rules during a wide crisis), or even a firesale of assets, which can lead to insolvency. They remain solvent by owning more assets than liabilities. The difference between all short term liabilities (deposits) in the banking system and central bank money is the total money multiplier. Fortunately, unlike confused writers of that article, people actually making decisions in almost all central banks still know that's how it works - which is why they know that rising interest rates reduces inflation (although not instantly). Erdogan, in comparison, appears to believe that high interest rates create inflation - results are visible for everyone.
- flashfaffe2 4y ago
  "And they need to put firms with foreign borrowings through administration to get rid of the foreign debt." Though I totally understand the idea, I however think it is easier said than done. Turkish ( or any other country) companies have the same issue: low us interest rates and common sense applied here: they took advantage of the situation by borrowing in US dollar. There was nothing much the Turkish government could do about that.
  - neilwilson 4y ago
    "There was nothing much the Turkish government could do about that." They can. They can change the "trading while insolvent" rules so that it is in all currencies the firms deals with, not just the reporting currency. Then if you can't get the forward swaps, the firm is insolvent and has to be put through administration - which will wipe out the dollar debt rather than cause a wave of Lira for dollar selling. Capitalism without bankruptcy is like Catholicism without hellfire. It stops the control system working.
    - flashfaffe2 4y ago
      My point was referring to any companies from emerging countries who need assess to finance ( exporting into the US or Europe which is the case for many Turkish company). Not only the ones being insolvent. They assesment is made at the entity level. The macro effect is not taken into account by them.
- adam_arthur 4y ago
  How can you MMT people exist when there are already thousands of business/credit cycles throughout history that disprove your beliefs? To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history. Turkey kept rates low exactly as you suggest, and this massive inflation is the result
  - neilwilson 4y ago
    "To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history" Except for the ones analysed by the Fed. > We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence. [0]: https://www.federalreserve.gov/econres/feds/files/2022028pap.pdf https://www.federalreserve.gov/econres/feds/files/2022028pap...
    - adam_arthur 4y ago
      Yes, fiscal factors and excess labor supply will keep inflation constrained. But to say higher interest rates lead to higher inflation is simply wrong as evidenced by a huge wealth of history/data. Every country that has tried to combat inflation with lower rates has led to an inflationary spiral. In a perfect world inflation would be controlled primarily via fiscal policy, but this is non-viable in the US political system. E.g. despite the Democrats being savaged in the polls due to inflation, they have yet to actually propose any package to help address inflation. Instead they just tried to convince people that BBB was inflation fighting, when in reality it's structured as a highly inflationary set of legislation. The Fed can't be as targeted as fiscal policy can, so their mechanism to combat inflation naturally leads to recessions. Fiscal could be much more targeted, e.g. temporary taxes on discretionary goods etc. It just so happens to be that sensible policy to curb inflation would also be highly unpopular to most
koheripbal 4y ago
Zimbabwe is a completely different animal. They had an economic collapse due to the exodus of people, corporations, and capital at the end of their civil war. The currency becoming worthless was a symptom of all that, not the cause.
- jcbrand 4y ago
  Zimbabwe had Hyperinflation more than 20 years after achieving independence and the civil war ended. It was because of land invasions where land was stolen from productive white farmers (and later mines) and the resultant collapse of the agricultural sector and therefore loss of foreign currency which they tried to solve with money printing.
  - unmole 4y ago
    > where land was stolen from productive white farmers Pray tell us, how did white farmers come to own land in Zimbabwe?
    - jcbrand 4y ago
      Everybody impoverishing themselves via hyperinflation seems a bit like a counterproductive way to deal with historical inequities. Many of the white farmers bought the land (from other farmers) and didn't take it by force.
      - unmole 4y ago
        Mugabe's land reforms most definitely had a devestating impact on agricultural productivity. But the hyperinflation was almost entirely a monetary phenomenon. All the productivity in the world won't mean anything if the money printers are running at full steam. > Many of the white farmers bought the land (from other farmers) and didn't take it by force. Knowingly buying stolen goods is not much better than stealing.
        jcbrand 4y ago
fallingfrog 4y ago
This is correct, and I’m not sure why more people don’t realize this. You can run right down the list: Venezuela, Weimar Germany, etc etc and the rule always holds- hyper inflation is caused by printing money in your own currency to pay debts that are denominated in a foreign currency.

pmontra 4y ago

Inflation 73%? Interest rate is 14% https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en https://www.tcmb.gov.tr/wps/wcm/connect/en/tcmb+en

neilwilson 4y ago

Raising interest rates just makes things worse. You’re paying people more money which they then spend to keep up with the prices. Interest/price spirals work in the same way as wage/price spirals https://new-wayland.com/blog/interest-price-spiral/ https://new-wayland.com/blog/interest-price-spiral/ Turkey is suffering from a collapse in their terms of trade. They need to stop luxury imports to make room for food and fuel. And they need to put firms with foreign borrowings through administration to get rid of the foreign debt. Ultimately though government needs to cut its spending because its capacity to tax is probably at the social limit the society can stand. It’s a mess, but neoliberalism won’t help.

nootropicat 4y ago
Well, Erdogan agrees with you and results are clear. The argument is wrong, mostly because even if deposit and borrow rates were equal (they aren't), central bank offers and charges it on MB, but borrow rate is in the end charged on all loans in existence - much larger than MB. 1. someone borrows (new) $100 from the central bank at the variable central bank rate - currently 0% 2. someone buys something for that $100 3. that $100 is loaned to yet another person at the variable rate 4. that person buys something with it, the buyer deposits $100 to the central bank At the end there's: $100 in the central bank. Loans for $200. Increasing the interest rate to 1% increases total liabilities by $2 after one year, but total base money only to $101. That's a deficit of $1. In other words demand for money has increased relative to the supply. This mechanism explains why more advanced economies can function with lower interest rates - because even a small base rate has a high multiplier, while in simple economies the multiplier is low. There are more implementation details in practice but the fundamental mechanism stays the same.
- neilwilson 4y ago
  Except that isn’t how banks work and never has been has it. The BoE debunked this nonsense years ago and yet you’re still trotting it out? Why? Bankers are people - they earn the interest and spend it with firms who then pay the banks. Bank Interest is funded by paying the interest. What that means is interest is simply the wages of bankers who are paid for making collateral discounting decisions. The central bank pays reserve holders and banks create money out of nothing. Erodogan has not cut spending nor diverted the import of gold to the import of food and fuels for his population. Or done anything I suggest. [0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
  - nootropicat 4y ago
    That article manages to contradict itself. In one place they state "In reality, neither are reserves a binding constraint on lending," and in another "But whether through deposits or other liabilities, the bank would need to make sure it was attracting and retaining some kind of funds in order to keep expanding lending", right after writing about running out of reserves, a direct contradiction. In general it's mostly correct but authors appear to be really confused, repeating statements from other sources without any understanding. A sign of how incompetent western establishment is becoming. The mechanism is very simple. Central banks lend money and that's how money is created. They do it by accepting various collateral. Whether they lend directly as debt or by purchasing assets via a reverse repo is a detail. Banks remain liquid by either holding money directly, or assets that are accepted as collateral by the central bank to generate new money instantly. Sometimes that liquidity runs out, which may then require a special central bank intervention (like relaxing collateral rules during a wide crisis), or even a firesale of assets, which can lead to insolvency. They remain solvent by owning more assets than liabilities. The difference between all short term liabilities (deposits) in the banking system and central bank money is the total money multiplier. Fortunately, unlike confused writers of that article, people actually making decisions in almost all central banks still know that's how it works - which is why they know that rising interest rates reduces inflation (although not instantly). Erdogan, in comparison, appears to believe that high interest rates create inflation - results are visible for everyone.
flashfaffe2 4y ago
"And they need to put firms with foreign borrowings through administration to get rid of the foreign debt." Though I totally understand the idea, I however think it is easier said than done. Turkish ( or any other country) companies have the same issue: low us interest rates and common sense applied here: they took advantage of the situation by borrowing in US dollar. There was nothing much the Turkish government could do about that.
- neilwilson 4y ago
  "There was nothing much the Turkish government could do about that." They can. They can change the "trading while insolvent" rules so that it is in all currencies the firms deals with, not just the reporting currency. Then if you can't get the forward swaps, the firm is insolvent and has to be put through administration - which will wipe out the dollar debt rather than cause a wave of Lira for dollar selling. Capitalism without bankruptcy is like Catholicism without hellfire. It stops the control system working.
  - flashfaffe2 4y ago
    My point was referring to any companies from emerging countries who need assess to finance ( exporting into the US or Europe which is the case for many Turkish company). Not only the ones being insolvent. They assesment is made at the entity level. The macro effect is not taken into account by them.
adam_arthur 4y ago
How can you MMT people exist when there are already thousands of business/credit cycles throughout history that disprove your beliefs? To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history. Turkey kept rates low exactly as you suggest, and this massive inflation is the result
- neilwilson 4y ago
  "To be clear, raising interest rates to appropriate levels curbs inflation as evidenced by all of financial history" Except for the ones analysed by the Fed. > We show that a nearly 90 percent reduction in inflation volatility is possible even without any changes in monetary policy when the economy transitions from equal shares of power between workers and firms to a new balance in which firms dominate. In addition, we show that the decline of trade union power reduces the share of monopoly rents appropriated by workers, and thus helps explain the secular decline of labor share, and the rise of profit share. We provide time series and cross sectional evidence. [0]: https://www.federalreserve.gov/econres/feds/files/2022028pap.pdf https://www.federalreserve.gov/econres/feds/files/2022028pap...
  - adam_arthur 4y ago
    Yes, fiscal factors and excess labor supply will keep inflation constrained. But to say higher interest rates lead to higher inflation is simply wrong as evidenced by a huge wealth of history/data. Every country that has tried to combat inflation with lower rates has led to an inflationary spiral. In a perfect world inflation would be controlled primarily via fiscal policy, but this is non-viable in the US political system. E.g. despite the Democrats being savaged in the polls due to inflation, they have yet to actually propose any package to help address inflation. Instead they just tried to convince people that BBB was inflation fighting, when in reality it's structured as a highly inflationary set of legislation. The Fed can't be as targeted as fiscal policy can, so their mechanism to combat inflation naturally leads to recessions. Fiscal could be much more targeted, e.g. temporary taxes on discretionary goods etc. It just so happens to be that sensible policy to curb inflation would also be highly unpopular to most

koheripbal 4y ago

Zimbabwe is a completely different animal. They had an economic collapse due to the exodus of people, corporations, and capital at the end of their civil war. The currency becoming worthless was a symptom of all that, not the cause.

jcbrand 4y ago
Zimbabwe had Hyperinflation more than 20 years after achieving independence and the civil war ended. It was because of land invasions where land was stolen from productive white farmers (and later mines) and the resultant collapse of the agricultural sector and therefore loss of foreign currency which they tried to solve with money printing.
- unmole 4y ago
  > where land was stolen from productive white farmers Pray tell us, how did white farmers come to own land in Zimbabwe?
  - jcbrand 4y ago
    Everybody impoverishing themselves via hyperinflation seems a bit like a counterproductive way to deal with historical inequities. Many of the white farmers bought the land (from other farmers) and didn't take it by force.
    - unmole 4y ago
      Mugabe's land reforms most definitely had a devestating impact on agricultural productivity. But the hyperinflation was almost entirely a monetary phenomenon. All the productivity in the world won't mean anything if the money printers are running at full steam. > Many of the white farmers bought the land (from other farmers) and didn't take it by force. Knowingly buying stolen goods is not much better than stealing.
      - jcbrand 4y ago

fallingfrog 4y ago

This is correct, and I’m not sure why more people don’t realize this. You can run right down the list: Venezuela, Weimar Germany, etc etc and the rule always holds- hyper inflation is caused by printing money in your own currency to pay debts that are denominated in a foreign currency.