Saturday, December 18, 2021

Neochartalists (“MMTers”) On Turkey — V. Ramanan

This is an old debate begun by the opposition between Warren Mosler and Wynne Godley. The former dismissed the crucial importance of the international position/balance of payment that Wynne Godley held.

Turkey is addressing its trade balance by increasing military exports while sticking with low rates on the assumption that raising the interest rate is a price increase that is passed through the economy. This can still be correct even if the international position/BoP is also a significant factor.  So the question comes down to how significant it is relative to monetary and fiscal policy.

The Case for Concerted Action
Neochartalists (“MMTers”) On Turkey
V. Ramanan

13 comments:

Matt Franko said...

Their policy rate is still high it’s like 14% while EZ is still a slightly negative rate…

Unknown said...

Policy rate is still high after years of rate hikes. In addition, they're running a record fiscal and trade deficit.

Unknown said...

Floating exchange rates float so why the outcry over a realignment of exchange rates? Do they want fixed rates now?

Matt Franko said...

Maybe they are importing electricity and nat gas and have to pay for it in EUR….

Darren said...

It took me a long time to weigh this debate some time back.

My conclusion was:

It depends.. It depends on a lot of political factors and choices of both domestic and foreign nations.

Balance of payment crises are usually but not always a political confection of those who own or hold sway over particular foreign currencies along with political sanctions. Balance of payment issues are nearly always a political power play by an actor. However, there are developing nation situations where it can occur naturally due to inappropriate political choices.

None of these events negate anything espoused by Modern Monetary Theorists.

NeilW said...

Ramaman struggles with this.

What he misses is that savings are an export product.

The issue in Turkey is a simple Dutch Disease problem, and it is has been caused not by exporting Oil or other scarce physical resources, but by exporting a currency with a high interest rate attached.

So when Erdogan says he no longer believes in high interest rates, that's like Saudi saying it no longer believes in exporting oil.

What it means is that Turkey is going to have to go through some pain to get the system under control. Interest rates need slashing to zero so that you are no longer pumping Lira into the system. That will likely cause the spot exchange rate to go from where it is now to the one year - a big currency drop.

Then you have to stop importing luxuries so that import space is freed up for needed goods and services, and you have to look at the exports to make sure you are making what the rest of the world wants right now.

Almost certainly the best tax at present is an exchange tax in the Lira to anything else direction, so that exchange out of Lira causes a reduction in the supply of money.

Taxes need to be high and rigorously enforced and government spending needs to be set at a Lira price with government refusing to order contracts until the price drops to the ones specified.

There's going to have to be a lot of transitioning to unemployment for a lot of people currently working in export trades the world no longer wants, or building roads to nowhere that people don't need. That unemployment then need relieving at the living wage via a Job Guarantee.

The Turkish economy has been built on sand and used as a cheap labour outlet by developed nations. It needs to be rebuilt with more solid foundations.

Tom Hickey said...

Thanks for the comprehensive analysis in a nutshell, Neil.

In Ramanan's defense, I would say that maybe MMT economists should make this clear to obviate criticism of what appear to be overly simplistic solutions.

Price stability (inflation) and currency stability (exchange rate) are huge concerns for just about everyone in one way or another.

It's one thing to get rid of the incorrect understanding about government finance based on the household analogy. Now more needs to be done to educated about price and currency stability, which is where most of the criticism is coming from now.

lastgreek said...

"Maybe they are importing electricity and nat gas and have to pay for it in EUR…."

Or maybe their mercenary soldiers in North Africa and Asia demand payment for bloody services in Euros or dollars?

Who the hell gives a hoot about the bloody state of Turkey?

Peter Pan said...

A fight, a fight, a Greek and a Turk.

lastgreek said...

Why fight, or better said, defend your internationally recognized territory, when you can simply acquiesce (look! I know big words!) to the aggressor's demands?

Math trivia: Last week I dreamt of circles (prettiest of shapes I think), but in truth I was really dreaming of ellipses. You see, a circle is but a special case of an ellipse. So... all circles are ellipses, but not all ellipses are circles -- you know, like squares and rectangles

Ahmed Fares said...

Turkey's problem is this as noted in an article today at ZeroHedge:

The central bank was worried that Turkish borrowers might not be hedged against the lira’s weakness and would begin to default on foreign currency loans, which accounted for 40% of the Turkish banking sector’s assets.

From a 2018 article by Brad Setser:

One emphasizes the foreign currency borrowing of Turkey’s companies, who will struggle to repay their foreign currency loans at the current exchange rate. That certainly has a large element of truth to it. Turkey's firms have around $335 billion in foreign currency debt, and it seems that a number of the firms that took out foreign currency loans don't really have natural hedges.* There will be a lot of quiet restructurings, and probably a few noisy defaults.

Framing Turkey’s Financial Vulnerabilites: Some Rhymes with the Asian Crisis, but Not a Repeat

From a 2020 article by Brad Setser:

A few years back, the big balance sheet risk in Turkey that worried outside analysts was the foreign currency exposure of Turkey’s corporate sector, as Turkish firms had significant external borrowing and had, in many cases, taken out large foreign currency denominated loans from the domestic banks. A weaker lira means, obviously, that any existing foreign currency debt is harder to pay back.

The Changing Nature of Turkey’s Balance Sheet Risks

NeilW said...

"he central bank was worried that Turkish borrowers might not be hedged against the lira’s weakness and would begin to default on foreign currency loans, which accounted for 40% of the Turkish banking sector’s assets."

Why do they need to worry about that?

That's exactly what they should be doing - defaulting on dollar debt due to the shift in currency, and the firms *and banks* that have advanced those loans should go bankrupt.

If you want to stop inflation, then somebody has to pay the price. Throwing a bunch of over confident bankers and their backers on the fire is exactly what is needed.

But because policy is set by bankers, not politicians, they won't leave their own to the wolves.

Matt Franko said...

“ But because policy is set by bankers”

Yo, The exchange rate is set by bankers,,,