The currency war that took place in Turkey is eye-opening. Instead of tightening monetary policy and addressing inflation, the Turkish president pursued a life-and-death showdown with international hedge funds through loose monetary policy. Whether this war can finally be won is worth looking forward to.
The Turkish president was very happy and militaristic, resulting in serious inflation in the country. International financial institutions have stepped in, using short-selling mechanisms, ready to make a windfall in Turkey.
As is common practice, if the Turkish currency depreciates, monetary commitments should be tightened to ensure domestic price stability. But what never occurred was that the Turkish government did the opposite. Through the implementation of loose monetary policy, a great showdown was waged against the investment funds of Western capitalist countries.
What the Turkish government has done has rewritten the theory of monetary policy. According to the traditional practice, if the currency depreciates sharply and there is serious inflation, then the most effective way is to reduce the circulation of the currency and solve the problem of inflation by raising interest rates. However, the Turkish Government's approach is clearly aimed at international speculators and is a desperate bet.
First of all, the Turkish government judged that the reason for the serious inflation in Turkey was fueled by external forces. That is why the Turkish President, by replacing the governor of the Central Bank, has targeted the International Investment Bank and regarded the use of short-selling mechanisms by the International Investment Bank to storm the Turkish money market as a provocation, using the power of the state to wage a trench war with the International Investment Bank.
The strategy adopted by the Central Bank of Turkey is that since the IIB believes that a sharp depreciation of the Turkish currency may lead to the conversion of Turkish residents and businesses into the US dollar, it takes measures to allow the Turkish currency to continue to depreciate, and at the same time, to obtain huge benefits from trading in the US dollar.
The Turkish government's approach is typical of the Turkish currency to continue to depreciate, and when the depreciation reaches a certain level, there will naturally be dollars entering Turkey, and at that time, it is too late to clean up the international investment bank.
In the face of the Turkish government's backwater war, the International Investment Bank seems to be a little worried that if it continues to short the Turkish currency, it may lose all its money. Because of this, they withdrew after making huge profits in Turkey's financial markets, and in this way, the depreciation of the Turkish currency would be alleviated.
Second, the reason why the Turkish government continues to implement a loose monetary policy is that it hopes to earn more dollar foreign exchange by expanding exports. Now the Turkish government lacks dollar foreign exchange, and the Turkish currency depreciates, which is conducive to expanding exports and earning dollar foreign exchange. Coupled with the fact that the international investment bank in order to short the Turkish currency, a large number of dollars into the Turkish financial market, objectively make the Turkish government realize that the arrival of the dollar may be a double-edged sword for Turkey, if it can be through the modification of laws or policies, the dollar currency that has flowed into Turkey will be intercepted, then the international investment bank may lose all its money.
The IIB's biggest fear is that the Turkish president will suddenly change his mind and ban the export of the DOLLAR currency by enacting laws or changing policies, at which point the IIB will be at great risk. Determined to make huge profits, they decided to stop the short-selling mechanism and withdraw from turkey's currency market. Turkey's currency has turned a corner.
Third, the Turkish president's "hedging" behavior of directly facing the international investment banks regardless of the domestic economic situation has brought great difficulties to the Turkish people. The vast majority of the people in Turkey have difficulties due to currency depreciation, inflation and hardship. Some taxi drivers are precarious and have to quickly convert the Turkish currency they earn into dollars. In order to reassure the people, the Turkish government has adopted a strategy that if it does not participate in the currency run, then the Turkish government promises to protect domestic savings deposits from exchange rate fluctuations, and if the Turkish currency falls against the dollar more than the interest rate promised by the bank, the government will make up for the losses of depositors in Turkish currency. This is of great practical significance for stabilizing depositors in Turkey.
The Turkish government's approach of increasing exports through currency depreciation and fighting a trench war with the IIB hedge fund had an immediate effect in the short term. The Turkish currency appreciated rapidly, and price growth in Turkey fell back. However, no one can guarantee whether this phenomenon will continue.
The reason for this is that Turkey's economy is already fragile. In recent years, the Turkish president has been militaristic, involved in the War in Syria, the War in Azerbaijan, and the War in Libya, trying to portray himself as a regional hegemon. These wars required a lot of money, coupled with the Turkish government's massive construction, underground railways, and the construction of the largest mosque, which led to the emptiness of Turkey's national treasury. Turkey already has few foreign exchange reserves, and if this position war fails, turkey will have to send a distress signal to the international community.
In the 1980s, a similar scenario occurred in Latin American countries. Due to the entry of foreign capital, the economy has developed rapidly. However, when the government expanded spending, the tax burden increased, and foreign companies withdrew, the economies of Latin American countries soon collapsed, and some countries experienced serious economic crises.
Latin American countries such as Argentina have had to turn to the International Monetary Fund for help in order to save their economies. However, when Argentina applied for help from the International Monetary Fund, the International Monetary Fund made a series of demands that Argentina control inflation and reduce government intervention. Argentina had to agree to all the terms in order to obtain a loan from the International Monetary Fund. As a result, the Argentine economy remains in jeopardy.
Turkey is clearly aware that turkey's national credibility will be severely affected if it seeks help from the IMF, or if it uses the IMF's Special Drawing Rights. Because of this, the Turkish president quickly cut through the chaos, successively replaced a number of central bank governors, implemented his own ideas, continued to implement loose monetary policy, and stimulated exports with monetary policy by increasing the issuance of currency, in exchange for foreign exchange.
As it turned out, the Turkish president had temporarily won the stakes of the century. Due to the large increase in exports, coupled with the fact that hedge funds entered the Turkish market, they were worried that the Turkish government would close their doors and withdraw, and the price of the Turkish currency rose, and the crisis caused by inflation was alleviated.
The Turkish government's approach may be a bigger risk. First, Turkey's domestic economic problems have not been completely resolved. Although the depreciation of the currency has led to an increase in exports, it is doubtful whether exports in exchange for foreign exchange can fundamentally solve Turkey's deep-seated economic problems.
Turkey's fundamental problem is not inflation, but good luck. When the Turkish president formulated the national strategy, he did not take into account Turkey's economic affordability and did whatever it took to achieve regional hegemony. Doing so will inevitably lead to an empty national finance and a serious shortage of foreign exchange reserves.
What the Turkish government is doing is actually drinking and quenching thirst, and if the international hedge fund kills a horse gun, then Turkey's foreign exchange earned by increasing exports through currency depreciation is likely to be quickly depleted. In fact, Turkey's foreign exchange reserves remain at relatively low levels, and turkey could lose once a large hedge fund re-launches an impact on the Turkish currency.
Second, in order to consolidate his ruling position, the Turkish president has been constantly waving his political checks in recent years, and Turkey's public spending has been increasing. As we all know, when a person's appetite becomes larger, it will become very difficult to reduce food. The dilemma facing the Turkish government now is that if it is lean and economical, it is likely to lead to the shaking of the Turkish president's ruling position. However, if austerity is not adopted and extravagance continues, Turkey's fiscal situation will further deteriorate, and it will not be long before Turkey may erupt into a debt crisis.
The Turkish president's massive infrastructure construction and growing public spending have laid a time bomb for Turkey's future economic development. If the Turkish president changes his existing policies, he will jeopardize his political position. However, if the existing fiscal policy cannot be changed, and sustained economic growth, improvement of people's livelihood and increase the income of residents can be achieved by reducing expenditures, then political conflicts may break out in Turkey at any time.
Turkey's religious leaders once staged an unsuccessful military coup. Ostensibly, the military coup was due to differences in political ideals between the Turkish president and Turkey's religious leaders, but in essence, it was because turkey's economic conditions had changed, with vested interests benefiting more and more from Turkey's economic policies, while the vast majority of the population suffered from the interests of the Turkish president's fiscal policies. The unsuccessful military coup was used by the Turkish president to purge dissidents. As a result, the political divisions in Turkey have become more pronounced. Now that there are serious problems in Turkey's domestic economy, the Turkish President has temporarily alleviated the crisis in his own unique way. But whether the financial crisis will make a comeback and whether inflation in Turkey will continue remains to be seen.
Analyzing the Turkish economic crisis helps people to re-understand the internal logic of monetary policy. When inflation in a country is getting worse, tightening is the first option to consider. However, the Turkish president did the opposite, scaring away the hedge funds by devaluing the currency and fighting a showdown with the hedge funds of the International Investment Bank. This is an unprecedented currency war. In this currency war, the Turkish president won the battle, but no one can give a positive answer to whether the entire war can be won. The Turkish government's hard-hitting strategy of stabilizing the price of the currency is an unprecedented major case, and this currency war deserves the attention of all scholars who study monetary policy.
The reason why I am pessimistic about the Turkish economy is because inflation in Turkey is only the result, not the cause. The deep-seated reason is a series of economic and foreign policies of the Turkish president. If the Turkish president frequently interferes in the internal affairs of other countries, provokes trouble in the surrounding areas, and provokes wars, then, although Turkey has a certain economic strength, in the war that is constantly launched, the national finances will be exhausted, and the economic collapse will be sooner or later.