The inflationary policies of Turkish president Recep Tayyip Erdogan confirm two standard economic predictions. First, increasing the money supply, other things being equal, causes inflation. Second, the weakening of independent countervailing institutions by a dictator or would-be dictator will lead to policies entirely focused on the latter’s self-interest.
Erdogan’s central bank has been buying assets with newly created money in order to push interest rates down. (Other policy instruments may also have been used.) Erdogan wants low interests because, like Trump, he believes that they boost the economy and, thus, his popularity with voters. He apparently also wants to signal his Islamic colors by following this religion’s prohibition of usury. Not surprisingly, annual inflation runs at between 21% and, according to Professor Steve Hanke of John Hopkins University, 83% per year (see Steve Hanke, “A Way for Turkey’s Erdogan to Have His Cake and Eat It Too,” National Review, December 1, 2021—I don’t like the title much as it obscures the fact that Erdogan is eating the people’s cake).
Another expected consequence has been a crash of the Turkish lira, which dropped 45% since the beginning of this year. Not only does a larger supply of a currency on the foreign exchange market push its value down (ceteris paribus), but investors will switch to other currencies and invest in countries with higher interest rates. Moreover, investors will fear continuing devaluation and dump more of the currency, accelerating the downward spiral. Many ordinary Turks are “rushing to trade their shrinking wages for dollars and gold,” tempting the government into imposing exchange controls. Many fear a bank run.
These expected consequences are apparently not expected by Mr. Erdogan, who is defending his own intuitive economic theories—much as Trump did, even if the latter was better restrained by American institutions. Erdogan believes that interest rates cause inflation. It is useful for a dictator to have some knowledge of economics or sufficient wisdom to hire or believe advisors and officials who do. Erdogan has been firing all those—including three central bank governors in less than years—and replaced them with blindly loyal and ignorant yes men. In the meantime, the standard of living of ordinary Turks is in free fall and discontent is mounting. The Wall Street Journal reports that
officials from Erdogan’s party have also called on Turks to eat less, sacrificing for the good of the country.
This leads us to the second lesson of Erdogan’s monetary policy. Precisely to prevent one man (including woman, of course) from running his own little self-interested policies on the back of common people, independent institutions have evolved and been tweaked to control the strongman’s power: notably a legislative branch, a state bureaucracy, an independent judiciary, a semi-independent central bank, not to mention strong private organizations. Mr. Erdogan has spent many years defanging these countervailing powers, to the point where his whims and obsessions meet little opposition.
Both with Mr. Trump (who said in 2019 he was a “big fan” of Erdogan, who had done “a fantastic job to [sic] the people of Turkey”) and with his successor in the White House thus far, Americans are lucky that countervailing powers are holding up—more or less.
READER COMMENTS
rsm
Dec 8 2021 at 12:35pm
《First, increasing the money supply, other things being equal, causes inflation.》
Why didn’t this work for the Fed from 2008-2019? Did they want inflation, yet could not produce it, despite economic predictions?
《officials from Erdogan’s party have also called on Turks to eat less, sacrificing for the good of the country》
Shouldn’t meat be $infinity, for the good of animals?
Henri Hein
Dec 8 2021 at 1:18pm
Other things were not really equal in 2008, but still, monetary policy was tight. See for instance What went wrong in 2008.
Craig
Dec 8 2021 at 3:12pm
“Why didn’t this work for the Fed from 2008-2019? Did they want inflation, yet could not produce it, despite economic predictions?”
They did but there are other sources of money creation/destruction of course in the commercial banks. The Fed did engage in QE and there was an expectation of more serious inflation which never materialized. I would suggest the Center for Financial Stability’s broad measure of M4 might be something worth briefly perusing: https://centerforfinancialstability.org/amfm_data.php?startc=2004&startt=2005
In a 2021 article here on CATO, Hanke offers his calculation for the golden growth rate of the M4 money supply to achieve the Fed’s inflation target of 2%: https://www.cato.org/commentary/why-more-us-inflation-right-around-corner
He calculates it to be 6.3%
As Friedman said, “Inflation is, always and everywhere, a monetary phenomenon”
Pierre Lemieux
Dec 8 2021 at 3:15pm
rsm: I want to emphasize what Henry Hein said about ceteris paribus. Every scientific theory, nay any rational explanation, is on a ceteris paribus basis. Otherwise, one’s implicit theory is that “everything causes everything.” The causal relation between the money supply and inflation (ceteris paribus) is so potent that, sometimes, it is visible even when other things are not maintained equal: see the two charts at https://www.econlib.org/mmt-gospel-is-this-time-different/.
rsm
Dec 9 2021 at 12:39am
Pierre, haven’t we all seen those charts? But do they ignore the relative size of the dots? If you include volume, does your statistical significance disappear?
My larger question is, so what? Why can’t you print money faster than prices rise and distribute it equally?
Rather than a causal relation, does money supply cause inflation only because enough people believe it? In other words, is inflation just psychological, and easily fixed with indexation?
Are you ignoring money demand? Is demand for the dollar so strong today that Covered Interest Parity has been violated for well over a decade, meaning that despite Jose Pablo’s claims that the dollar has lost 96% of its value since 1913, future dollars are worth more than present dollars in the very voluminous Foreign Exchange swap market?
Thomas Lee Hutcheson
Dec 8 2021 at 1:17pm
I can scarcely believe *I* am doing this, but I must make a partial and contingent defense of one policy of ex-President Trump.
If we understand Trump’s call for “lower interest rates” as a call for the Fed to raise the average inflation up to what it had said was its target for inflation (2% pa increase in the PCE index), this this was an appropriate policy objective. He should have done that in ways that did not appear so blatantly to impinge on Fed independence, but the direction of Fed intervention was correct.
Pierre Lemieux
Dec 8 2021 at 9:06pm
I fear, Thomas, that you have assumed a thankless chore, and I sympathize with you. You write, “If we understand Trump’s call for “lower interest rates” as a call for the Fed to raise the average inflation up to what it had said was its target for inflation”… Trump explicitly told you not to understand him that way. He just wanted to compete with Obama and he thought it was impossible (he probably thought it was unfair competition and that he was “taken advantage of”) with higher rates than Obama had benefited from. For example–but it’s just an example–see https://www.theguardian.com/business/2016/sep/06/trump-us-federal-reserve-false-economy-interest-rates.
Craig
Dec 8 2021 at 9:54pm
Trump specifically cited the need for low interest rates which he expressly thought would help the government refinance the debt to long term debt. From the point of view of the world’s largest debtor, low interest rates is a necessity.
In fact, aa the Fes tapers and assuming no retreat after a taper tantrum the interest rates could be, well, even SLIGHTLY higher can start to blow some holes in the budget. I believe the current WAM is 5 years.
Jose Pablo
Dec 10 2021 at 12:58am
“… start to blow some holes in the budget”
Well, the budget already has huge holes … 3tr of deficit in 2021. I would call that “a massive hole”.
And you only pay higher interest rates in “new debt” (refinancing + deficits), so you kind of need to “already have holes” in your deficit for higher interest rates “blowing” anything. This is not the definition of “starting”
We started the holes long time ago. And they are getting worse. Without any need for higher interest rates helping the “holing” of the budget.
Jose Pablo
Dec 8 2021 at 9:11pm
So, Thomas, the FED doing, slowly but steadily, in a matter of decades what Erdogan has done in a matter of years is “an appropriate policy objective“.
That’s interesting.
So, Trump is, by this account, “a patient Erdogan” as far as monetary policy is concerned.
Another interesting corollary would be that if Turkey would have a “Constitutional o Congress mandate” to target a 25% yearly inflation (anything about 21% will work, even less if you take into account the, let’s say, last ten years average) then Erdogan call for “lower interest rates” would be an “appropriate policy objective”.
So, all Erdogan has to do is make Turkish Congress (or even better change the Turkish Constitution) giving the Turkish Central Bank a mandate to target a 25% yearly inflation. That would make the Turkish Central Bank independent again and will make him a great “policy maker” and Pierre would have nothing to write about.
Craig
Dec 8 2021 at 3:15pm
“Today, I measured Turkey’s annual inflation rate at 82.9 percent per year.” (12/1/2021 measurement by Steve Hanke in National Review).
On twitter December 3rd, 2021 “Pres. Erdogan’s TCMB puppets report #Turkey‘s official November inflation at 21.31%/yr. This number is complete rubbish. Using high-frequency data & PPP principles, I measure Turkey’s #inflation at 84.87%/yr today, over 4x the official rate. More daily dishonesty from RTE & TCMB.”
So the monetary situation in Turkey seems to be deteriorating daily.
Jose Pablo
Dec 8 2021 at 6:49pm
I think, Pierre, that you put too much emphasis on the “independence of the countervailing institutions” and on “the wisdom of officials and advisors”.
It seems that the best that these two things can do is slowing down the process … but no more.
After all, since the creation of the FED in 1913 the US$ have lost 96% of its purchasing power (96%!!). Erdogan’s record does not look that bad in comparison.
https://www.visualcapitalist.com/purchasing-power-of-the-u-s-dollar-over-time/
Although, I have to admit, he seems to be a little faster than the “countervailing institutions” and the “wise experts”; but both systems seems to drive us to the very same place (sooner or later).
Pierre Lemieux
Dec 8 2021 at 9:18pm
Jose: Time is of the essence. It’s like in self-defense: you must not think, “well, I’m going to die one day anyway (and perhaps not in full health like today).” On the effect of abolishing countervailing institutions, Alexis de Tocqueville and Bertrand de Jouvenel are worth reading.
Jose Pablo
Dec 8 2021 at 9:25pm
Yes, “in the long run ….”
But clearly is not the same to say:
“Countervailing institutions and wise advisors prevent the loosing of value of the currency”
that to say
“countervailing institutions and wise advisors only delay the loosing of value of the currency”
The second statement seems to be the correct one. Is not, maybe, a minor achievement but I find it disappointing, nonetheless.
Pierre Lemieux
Dec 8 2021 at 9:38pm
A small point, Jose. I did not write about “wise advisors,” but about advisors who know something about economics. It is the wise dictator who (we hope, a vain hope without countervailing institutions) will hire them; what I wrote is:
As for self-defense, it cannot literally prevent death, it just delays it.
Jose Pablo
Dec 8 2021 at 10:56pm
Fair point, Pierre.
Please read ¨advisors who know something about economics¨ whenever I wrote ¨wise advisors¨.
And yes, we agree, ¨countervailing institutions¨ and ¨advisors who know something about economics¨ don´t prevent the dead of the real value of the currency, just delay it.
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