“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.”
The above sentences are by John Maynard Keynes. Keynes attended the Paris Peace Conference (1919) after World War I. He discussed the conditions of the Treaty of Versailles (1919) in his book The Economic Consequences of the Peace. The above sentences are an excerpt from this work.
Under the current circumstances in Turkey, there is no chance to talk about the economy as far as “economic policy” is concerned. As I mentioned in my previous article, even a glimmer of hope for keeping inflation under control is only possible through elections.
According to Turkish Statistics Institute (TUIK) data, consumer inflation, which was 19.25% in August 2021, reached 79.6% as of July 2022 due to policy rate cuts that started in September 2021.
The Central Bank of the Republic of Turkey (CBRT), which is responsible for ensuring monetary stability, did not use monetary policy and debauched the Turkish Lira in the words of Keynes quoted from Lenin. The USD/TL rate, which was 8.32 at the end of August 2021, is currently hovering around 18.00.
Inflation has been rising steadily since June 2021. There has been an inflation process in Turkey which Keynes refers to as “continuing”. Thus, a significant portion of citizens’ wealth is confiscated through a continuing process of inflation in Turkey. However, this does not happen secretly and unobserved in Turkey as Keynes stated.
Recently, the CBRT governor had meetings with the executives of the Istanbul Chamber of Industry (ISO) and the Union of Chambers and Commodity Exchanges of Turkey (TOBB). The business world complained about the lack of access to credit and the high interest rates. It was stated that monetary policy should offer predictability. However!
There has been a historic credit expansion in Turkey since the beginning of 2022. While it was clear that this would increase inflation sharply, the business world remained silent. The business world remained silent while the policy rate was being cut and inflation was booming. Large corporate profits were created at low interest rates while turnovers were swelling along with rising inflation.
Although it is still possible to utilize loans within the interest rate range of 30-50% while the rate of inflation is 79.6%, how can the business world complain about high interest rates? The criterion for the rate of interest as being low or high is the rate of inflation. The interest rate that is to bring inflation under control should be at least as much as the rate of inflation.
The government saw the inflationary consequences of credit expansion. Therefore, it activated the Banking Supervision and Regulatory Authority (BDDK) to put the brakes on credit expansion. With the regulations announced in recent weeks, the interest rates on loans in the market have started rising. Therefore, it was not meaningful for a central bank to meet with the business world since it has not fulfilled its mandate to provide monetary stability. The interlocutors at the table were not compatible.
It is observed that inflation is not business world’s concern. From the 1980s and 1990s, Turkey knows very well how high inflation favors the capital owners. Those are the same capital owners who brought today’s government to power back in 2002.
The incumbent government claims that interest rates have been lowered. In fact, they have been rising recently. In addition, the profits of the banking system have been breaking records! The main reason for this is the foreign currency protected deposit scheme devised by the government. Under the scheme, banks collect deposits at 17% and extend loans with an interest rate range of 30-50%. Under these conditions, the profits of the banks, of course, increased by 400% in the January-June period compared to the same period of the previous year.
There isn’t any coordination available in managing the economy in Turkey! However, banks are uneasy about the future despite high profits. Why?
Two more important issues drew attention at the meetings: companies’ tendency to hoarding and purchasing foreign currency by utilizing loans. When the TL is debauched and inflation constantly rises, it is quite normal for companies to turn to piling stocks and buy foreign currency in order to defend themselves financially. In economics, there is a concept called Gresham’s Law.
Recently, there has been a decline in loan demand. Exporters’ sales have been declining due to the global slowdown. Falls in global commodity prices will now have the following effect on firms accused of hoarding: the devaluation of stock created while trying to hedge against ever-rising prices.
The incumbent government has created a growth story based on credit growth. Putting sudden brakes on credit can potentially increase non-performing loans. Firms and households have become extremely addicted to living on loans in recent years in Turkey. The economy has started slowing down and the expectations of a global recession have been strengthening. We will monitor the September and December balance sheets from these perspectives. This is what worries banks.
Personal income in Turkey decreased from $11,289 per year in 2011 to $9,539 in 2021. Considering that the discussions about the relationship between inflation and interest started in the early 2010s, it is obvious that this negative development is a result of breaking the rules of economics.
Lowering the policy rate, soaring inflation and the exploding market interest rates! This is what Turkey has been undergoing. Let’s list the most noticeable negative consequences of high inflation. We will continue to analyze Turkey on the basis of these consequences in the upcoming days.
High inflation erodes purchasing power. Wages and salaries are particularly vulnerable to high inflation. Even if wages and salaries increase periodically, their purchasing power regularly weakens in the interim periods. A significant part of the wealth of citizens is openly and blatantly confiscated through a continuing process of inflation.
High inflation encourages consumption, not saving. The consumer wants to buy goods and services before those goods’ and services’ prices increase again; so that, the consumer can keep the cost of his consumption at a certain level. This cycle makes inflation self-feeding.
High inflation is a process that works in favor of the borrower. The real value of the interest and the principal declines due to high inflation. Therefore, maturities tend to shorten in borrowing mechanisms. Shortening of maturity means uncertainty about the future. Naturally, investments come to a halt under uncertainty.
High inflation raises market interest rates. However, this is observable under market economy conditions. Since the interest rates in Turkey are suppressed by non-market methods, the interest-increasing effects of inflation partially emerge.A debauched currency and the confiscation of a substantial part of the citizens’ wealth! The rules of economics have not been recently defined. Keynes explains even with a quote from Lenin.