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What's the theory that says interest rate cuts will _lower_ inflation? There must be something, otherwise they wouldn't do it, no matter how ridiculous it sound
by dom96 4y ago
What's the theory that says interest rate cuts will _lower_ inflation? There must be something, otherwise they wouldn't do it, no matter how ridiculous it sounds, right?
- seydor 4y agowhat makes us think he wants to lower inflation? afaik his plan is to boost exports
- dom96 4y agoFrom the article: > Turkish officials say that their measures will bring inflation down in the coming months, but many economists disagree and expect consumer prices to rise and the lira to fall further into next year.
- axus 4y agoIt sounds like the Turkish people will be working very hard for the benefit of the people importing from them?
- _Turk_ 4y agoYeah this is his primary belief tbh. I think the Islamic reasoning of interest rates are haram is more of a false flag reason. He genuinely wants to boost exports and thinks this is the way out. Either way both reasonings are not gonna work out well
- DethNinja 4y agoTurkey’s problems goes further than a simple interest rate increase. Even if they increased the interest rates, they would still have substantial inflation. Truth to be told I don’t think such third world economies can ever recover. It is too late for the patient.
- rm_-rf_slash 4y agoTurkey is not just some “third world economy”. It’s manufacturing exports have been doing great with cheap domestic currency and the tourism sector has remained strong, especially with the influx of involuntary tourists from Russia. Turkey is also a NATO member and occupies strategic territory. It will not die on the vine and wither away in silence.
- orwin 4y agoTurkey is India in ten years, Argentina 15 years ago, with the advantage of being able to extract some fossil fuels. They wasted demographic dividends, and they don't have enough natural resources to make up for it (but they have some). They didn't fucked up as much as Liban did, so they have that going for them. The only non western country to succeed their demographic transitions without abundant natural resources is Cuba, but imho that was thanks to the USSR.
- chomp 4y agoNitpick, but by the strictest definition, Turkey is a first world country.
- BuyMyBitcoins 4y agoWhen a country’s inflation rate hits 83% I feel like the conventional wisdom of raising interest rates to match or exceed the inflation rate won’t work. They’ve already lost control of the situation.
- Tuna-Fish 4y agoHe literally believes that inflation is caused by high interest rates, because he thinks that the Quran says so. [0] This is a common belief among a certain crazy subset of islamic economics, but to be clear, is not mainstream belief among Muslims. [0]: https://www.spectator.co.uk/article/islamonomics-how-erdogan-crashed-the-turkish-economy https://www.spectator.co.uk/article/islamonomics-how-erdogan...
- msoad 4y agoisn't charging interest illegal in Islam?
- ramesh31 4y ago>isn't charging interest illegal in Islam? As a straight up APY interest charge, yes. But there is an entire industry of "Sharia finance" that exists to circumvent these rules [0]. [0] https://www.investopedia.com/articles/07/islamic_investing.asp https://www.investopedia.com/articles/07/islamic_investing.a...
- boole1854 4y agoDoes Erdogan believe that the Quran says inflation is caused by high interest rates? That would be fascinating if true. However, the article you cited does not make that claim. It merely says that Erdogan is opposed to high interest rates because they are considered "usury" and are thus forbidden. This is different from saying that high interest rates cause inflation. Do you have a different source specifically for the claim that the some people think Quran indicates that high interest rates cause inflation?
- johnthewise 4y agoWell, there isn'a direct quote where he said this but it's pretty close. https://www.birgun.net/haber/erdogan-bir-musluman-olarak-nas-ne-gerektiriyorsa-onu-yapmaya-devam-edecegim-369953 https://www.birgun.net/haber/erdogan-bir-musluman-olarak-nas... this headline is the closest thing in it he says: '... and they are complaining about cutting the interest rates. Don't expect anything different from me. As a muslim, I'll continue doing what the religion/quran orders me to do. This is the ruling (of the religion).'
- lordnacho 4y agoI think the general meta-argument "if this thing didn't work why would someone do it?" just doesn't really work. It's at best a way to identify curious decisions.
- spuz 4y agoI think that's all it is - a question, not an argument. I'm curious about it too.
- faller_slive 4y agoAccording to Erdogan, it is not about economics. He says that is is following Islamic teaching. Technically any interest being charged is haram. > “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. https://www.bloomberg.com/news/articles/2021-12-19/turkey-s-erdogan-says-islam-demands-lower-rates-and-so-does-he https://www.bloomberg.com/news/articles/2021-12-19/turkey-s-...
- Tuna-Fish 4y ago> According to Erdogan, it is not about economics. This is not accurate. He literally believes in economic theory that holds that interest rates cause inflation. The root of this theory is Islamic belief, but it's not that he believes that inflation is a necessary evil to stick to his principles, he believes that increasing interest rates would increase inflation. He has been very open about this belief for a very long time. The short slogan he's used is, roughly translated, "interest is the cause, inflation is the result". For example, see: https://m.bianet.org/english/economy/254059-erdogan-insists-interest-rates-cause-inflation-cites-his-economics-education https://m.bianet.org/english/economy/254059-erdogan-insists-...
- malshe 4y ago> "interest is the cause, inflation is the result" He is right about this but wrong about the sign of the relationship!
- liuliu 4y agoIf you are supply-constrained, cheaper credit would help to build newer capacity to increase the supply, therefore, lower the inflation.
- throwawayffffas 4y agoNot sure, this came up in a odd lots podcast. You can find it by searching Understanding Turkey’s Bold Plan to Stabilize the Lira. It was 10 months ago but the basic idea, I think is that they are trying to get Turks to hold lira instead of dollars. Also its important to keep in mind that the typical central bank and economy dynamics that everyone has in their head typically is theories and dynamics mostly focused on the US and their market and there are axioms there that might not be true in the Turkish economy. Now I am not saying that what they are doing is going to work or its good. Just reminding everyone that what holds true for the Fed is not necessarily true for every other central bank. My personal opinion is that their plan is probably not working and they are trying to postpone the recession to after the elections.
- neilwilson 4y agoPrior to the 17th century there was never any interest on sovereign debt. It was the personal debt of the sovereign, imposed upon the ruling class and died with the sovereign. Paying interest on sovereign debt is a relatively recent invention that came about with the rise of banks. If you're Islamic then paying interest remains a sin. That is what Erdogan is following. Having said that paying interest on sovereign debt is, effectively, a basic income for people who have money. Getting rid of it is a tax on rich people with savings. However if you do that, then you have to set government taxation and spending policies for a Full Liquidity model of an economy, not a Full Funding model of an economy. Erdogan has not done that. Other than interest he is still Chicago School from what I can tell. And that way leads to disaster.
- boole1854 4y ago> Having said that paying interest on sovereign debt is, effectively, a basic income for people who have money. Getting rid of it is a tax on rich people with savings. A zero nominal interest rate, while possible, generally requires the central bank to implement a policy of deflation (see [1]). For example, in the US, the long term real interest rate on US treasury securities is 1.74%, so setting the nominal interest rate to 0% would require a deflation at a rate of (1.0174)^-1 per year (~1.71%). While this would eliminate some of the interest earned by "people who have money" it also has the counterbalancing effect of increasing the real value of the money which those people have saved, due to the deflation. [1] https://en.wikipedia.org/wiki/Friedman_rule https://en.wikipedia.org/wiki/Friedman_rule
- neilwilson 4y agoThe central bank is not in charge of the economy. They are servant, not master. Unfortunately that 'Friedman rule' belief relies upon there being a fixed amount of money and a one-to-one relationship between money and stuff. There isn't a fixed amount of money. There isn't a one-to-one relationship between money and stuff. Money grows and shrinks depending upon the transaction requirements of the real economy. A Full Liquidity rule, on the other hand, allows the government sector to adjust its taxation and spending positions and reduce the level of taxation required in a full employment environment.
- boole1854 4y agoYou may be interested in reading about the history of the quantity theory of money, particularly the disputes about it in the 19th century. In particular, the British "Banking School" was opposed to the quantity theory of the "Currency School". The Banking School claimed that inflation was cost driven, that interest rates were one of the costs of doing business, so that raising rates would increase costs which would increase prices. While superficially reasonable, this argument was destroyed Wicksell [1] who provided a more careful economic model which made it clear that rate-driven cost-push inflation was not at all plausible as a sustained cause of inflation. [1] https://www.richmondfed.org/-/media/richmondfedorg/publications/research/economic_quarterly/1997/fall/pdf/humphrey.pdf https://www.richmondfed.org/-/media/richmondfedorg/publicati...