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NPR's Planet Money Indicator podcast just did an episode[1] of this topic as it relates to Turkey, where the big cheese decided that in fact, no, high interest

• oliwarner 3y ago
  A lack of confidence can destroy a smaller currency on Forex markets. It's hard to study internal economic mechanisms in isolation when the world is constantly messing with your relative values.
• drdec 3y ago
  Turkey's situation was discussed in the article, I highly recommend reading it.
  • trog 3y ago
    > Turkey's situation was discussed in the article, I highly recommend reading it. Oh yep sorry I should have noted that as well - I just thought NPR's (slightly) deep(er) dive was also interesting & worth a read as a bit more of a case study where someone was VERY CONVINCED that low interest rates were the way out of inflation, and, uh, so far the evidence is not compelling that they were correct.
    • smashem 3y ago
      Low interest environments exist because liquidity is growing in the financial system. As that liquidity escapes into the consumer system, which it always does, it causes inflation.
      • issore 3y ago
        Right because once the public has real economic power the rich do not so they juice their prices, and meddle in other ways to deflate the buying power; aka inflate prices. $200k in the 80s would be $600k buying power now. But it’s barely middle class. Our society is entirely a wealth preservation scheme for people who cannot prove they did the work, they just have political documents of power.
      • dilyevsky 3y ago
        Then how would you explain ultra low interest rate for 10+ years without associated inflation spike? It was only until double/triple whammy of supply chain disruption/ government handing out cash/ opptunistic price gouging that inflation really took hold
        • mr_toad 3y ago
          Because the economy was growing as fast as the money supply.
        • MrFoxFriday 3y ago
          low interest rates are not always the result of loose monetary policy; given that the low rates didn't result in inflation, they likely reflected lower real growth expectations or other demand side factors.
        • MikePlacid 3y ago
          Supply chain disruption and opportunistic price gouging are actually SIGNS of inflation, not causes of it. In a socialist country I grew up in the opportunistic price gouging was illegal, so supply chain was ALWAYS disrupted… So, in your list the only true cause of inflation remains.
          • dilyevsky 3y ago
            Supply chain disruption came long before any inflation showed as a result of covid lockdowns
    • guhcampos 3y ago
      Low Interest Rates being ineffective against Inflation does not imply High Interest Rates are effective against inflation.
      • MikePlacid 3y ago
        Can I ask a question that really interests me: why do y’all care?
        • hgomersall 3y ago
          Because they read some stuff about economics and really really want to believe it.
        • rocqua 3y ago
          So we can have an informed opinion based on which to vote, and discuss with others to get them to vote more informedly (and in line with what we want).
          • MikePlacid 3y ago
            Our vote is irrelevant once a one-Party system is established.
      • Gareth321 3y ago
        I don't agree. The majority of the OECD practises contemporary monetary policy, using central bank interest rates to control inflation. All of those countries have inflation well below Turkey. Then we have Turkey, rejecting this policy, and experiencing extremely high inflation. Economics doesn't allow us to conduct controlled experiments. We have to work with the messy data that we have. When the vast majority of some of the smartest economists in the world who currently live and who have lived, all agree on principle of supply and demand, I find it compelling. When money is removed from circulation, demand drops. This almost always results in a reduction in prices. Rejecting the law of supply and demand is really out there as a fringe argument.
• derefr 3y ago
  The problems Turkey has had due to this are due to misaligned global-trade incentives, though, no? (I.e., having low interest rates during inflation, and so intentionally tanking your currency's foreign valuation, makes your exports even more worthless and your imports even more costly.) There might well be some kind of positive internal-macroeconomic effects, but they'd be impossible to detect through (and mostly irrelevant due to) the overriding external-macroeconomic impacts of these policies. It would be interesting to see whether a country that had little-to-no dependence on global trade — North Korea, say — would actually see its internal economy benefit from low interest rates during an inflationary crisis.
  • mucle6 3y ago
    Wouldn't a falling currency (say compared to USD) make the exports more valuable (compared to USD)?
    • dilyevsky 3y ago
      Yes devaluing currency is good for exports. Someone’s “worthless” is somebody else’s “good deal”
  • onlyrealcuzzo 3y ago
    If you don't think lowering interest rates causes the value of money to go down, ask what would happen if the central bank set the interest rate to negative 10%. Nothing happens in a vacuum. Things can't be reduced so much. But the idea that lowering interest rates will bring down inflation is not mainstream for a reason.
    • deleted 3y ago
      [deleted]
    • imtringued 3y ago
      >If you don't think lowering interest rates causes the value of money to go down, ask what would happen if the central bank set the interest rate to negative 10%. Lowering the interest rate below zero means that QE becomes irrelevant and that the central bank should undo all of it. Afterwards the central bank should raise the minimum reserve requirements above 50% and tighten its money supply as much as feasible. As holders of bank balances want to avoid negative interest fees, they will choose to invest in certificate of deposit accounts. The original borrowers now have an incentive to refinance their debts with this source and repay the money creating loans they have gotten from their banks which ultimately reduces the circulating money supply. If lenders refuse to accept a -10% return and instead lend at the rate of inflation, then borrowers will know when to stop without the government or central bank telling them to restrain themselves.
• neilwilson 3y ago
  How grim have the outcomes for Turkey been compared to, say, Argentina and Zimbabwe where the central bank has followed orthodox dogma? Turkey, unfortunately, hasn’t gone as far as to abandon the natural rate hypothesis. [0]: https://economicsfromthetopdown.com/2023/03/23/inflation-the-battle-between-creditors-and-workers/ https://economicsfromthetopdown.com/2023/03/23/inflation-the...
  • s1artibartfast 3y ago
    You can't say with that straight face that Argentina and Zimbabwe are following Orthodox Dogma. They aren't raising rates in an attempt to pull money out of circulation. They are essentially funding the government with the printing press and the results are exactly what you would expect. They are a case study in the problems with so called Modern Monetary Theory.
    • babyshake 3y ago
      I don't think MMT means you can just print as much money as you want, just that conceptually you can decouple how to pay for government programs from how to reduce inflation.
      • H8crilA 3y ago
        I think you meant "you can't decouple". The only logical thing in MMT was the promise to cut spending when inflation goes up. To which a rational response is that almost never you are able to cut back on social spending once you increase it.
        • neilwilson 3y ago
          "To which a rational response is that almost never you are able to cut back on social spending once you increase it." You can once you have actually understood MMT. How is the price anchor managed under MMT theory? How does that work during a boom and thereby solves the problem you posit? What are the three system stabilisation mechanisms in MMT theory? MMT suggests moving the stabilisation policy from the market for money to the market for labour and leaving the market to determine interest rates. That stops the current problems - price gouging, SME decimation, boom/bust in construction and increased mortgage rates.
• misja111 3y ago
  As I understand it, fixing inflation has never had much priority for the Erdogan government. They don't raise interest rates because raising them would slow down their internal economy. Downside is the devaluation of the Lira, but this also has an upside; Turkish exports become more competitive.
  • ulfw 3y ago
    Turkey imports way more than it exports. This hurts more than it helps, if at all.
  • H8crilA 3y ago
    This is my read as well. Claiming that high rates cause inflation, or that high rates are not Islamic, is just BS that sells his actual policy. Though I think the neo-ottoman himself was surprised how bad it actually turned out.
  • throwaway2037 3y ago
    Turkish exports become more competitive This is neither automatic, nor blanket. "Turkish exports" are a result of internal production of inputs, plus imports of inputs, followed by a "value add" phase, followed by exports. In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains. Also, the naïve view that currency deval is always beneficial to exports is simply untrue. It always complex and multifactor for each scenario and each country... and even each good. A better general rule: A modest, consistent devaluation of currency is good for your exports, as it allows enough time for your value add staged to find internally produced substitute inputs. If deval is very fast, few businesses can adapt fast enough. If deval is very slow, it is hard to notice the effect.
    • misja111 3y ago
      > In many cases, the greatly increased cost of imported inputs meets or exceeds the export gains. Can you explain how it can exceed the export gain? Say there is some Turkish export product, to keep it simple let's say it's a car which needs some metal as an input, that has to be imported. If the Lira goes down, this means the metal becomes more expensive in terms of Lira's. So this has to be accounted for in the price of the exported cars. However, that accounted price increase is the same as the rise in import price. What is left is the added value within Turkey, which has become cheaper because of the Lira drop. So even though export price drops are slower than the drop of the Lira, they still drop.
• yreg 3y ago
  Planet Money is an insightful podcast in general.
• tboyd47 3y ago
  > The results have been grim for the lira, to say the least. Has it? Everyone in the West was smugly predicting hyperinflation for the Turks in spring of 2022, but it just hasn't materialized.