Erdogan is putting Modern Monetary Theory to the test in Turkey’s presidential election
Tiana Lowe
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For the crime of daring to raise interest rates while inflation hits 40-year highs, Jerome Powell has been branded a “dangerous man” and a failure by Elizabeth Warren.
Perhaps the Massachusetts senator would prefer Recep Tayyip Erdogan instead.
WHAT WILL ERDOGAN DO IF HE LOSES TURKEY’S ELECTIONS
The Turkish president embraced Modern Monetary Theory, bullying Turkey’s central bank into slashing interest rates even as inflation hit double digits. Since September 2021, the Turkish central bank has slashed interest rates from 19% to less than 9%. In that time, inflation more than doubled from nearly 20% to more than 50%, reaching nearly 80% late last year. Over the past year, the lira has fallen 25% against the U.S. dollar.
Erdogan’s moronic monetary policy may be motivated by his interpretation of Islamic finance, and Warren’s by the equally onerous religion of progressivism. But their dogmatic oppositions to rational and practical economic analysis are the same. Under the mantle of populism, Erdogan has executed the monetary policy that Warren can only dream of.
Yet, seeing the results, who could possibly support it?
Turkey has long been dogged by price instability. Erdogan has blamed foreign intervention while on the campaign trail, but it is really a product of poor political choices within the country. For the past half-century, Ankara has repeatedly financed reckless domestic stimulus with foreign debt. As a consequence, it has had to print money recklessly just to meet its interest obligations.
The picture was not always so bleak. The government’s privatization of state-owned industries and deregulation of private ones, as well as a modest uptick in the female labor force participation rate, led to a rebound of economic growth at the turn of the century, bringing inflation down to a steady rate a bit below 10% from 2004 to 2018. While Turkey’s central bank succeeded in raising rates to offset a COVID-era inflation bounce, the fundamentalism of Erdoganomics was finally and fully executed in 2021.
While Turkey’s real interest rates were held around zero during that most stable period of price stability, real interest rates have ranged between -70% and -40%. Centuries of classical economics would explain how real interest rates in the negative double digits create ruinous hyperinflation. But Erdogan is adamant that “as long as this brother of yours is in power, the interest will continue to fall.”
In his ideological obsession with making the cost of borrowing cheaper than free, Erdogan, who is motivated by Shariah compliance, is no different than Warren. And both are no different from religious fundamentalists who, for centuries, leaned on an obvious perversion of Christ’s words to ban usury. The famous utilitarian Jeremy Bentham summed up the morality of the anti-usury Christians, anti-riba Muslims, and anti-growth progressives more than 200 years ago: “It is oppression for a man to reclaim his own money. It is none to keep it from him.”
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Just as cash flows from the Gulf kept Ankara afloat some 30 years ago, Russia is now stuffing Turkey’s coffers, accounting for tens of billions in unexplained inflows on Ankara’s balance sheet. Since widespread sanctions hampered its commerce after the invasion of Ukraine, Russia’s use of Turkish banking is a win-win for the two nations. But with prices doubling every two years, cash itself may not be enough.
The overwhelming majority of young Turks say they hope to emigrate from their country if they can. And there’s little hope for them ahead: Erdogan’s opponent is no classical monetarist, having blasted the president for failing to slash interest rates in 2018.