Economic turmoil in Turkey | National review

Turkish President Tayyip Erdogan addresses members of parliament from his ruling AKP party during a meeting at the Turkish parliament in Ankara, Turkey, Oct. 16, 2018. (Umit Bektas / Reuters)

Turkish President Tayyip Recep Erdogan pressed the panic button. On Saturday, he sacked Murat Uysal, the governor of the Central Bank of Turkey. Uysal is the second senior monetary official Erdogan has removed in the past 16 months. To add insult to injury, Turkish Finance Minister Berat Albayrak, Erdogan’s son-in-law, resigned his post on Sunday due to “health problems”.

This all follows the most recent collapse of the Turkish Lira, something that I predicted and wrote about regularly. Instability is nothing new to read it. Indeed, inflation has ravaged Turkey for decades. The average annual inflation rates for the 70s, 80s, 90s and 2000s were 22.4%, 49.6%, 76.7% and 22.3%, respectively. These horrific numbers mask the periodic routs of the read. In 1994, 2000-2001, and more recently since 2018, the lira was torn to shreds.

Since Erdogan took over the presidential reins from Turkey in August 2014, the lira has lost 75% of its value against the US dollar. And, since the first of this year, the lira has depreciated by 30% against the greenback. Today, inflation in Turkey is skyrocketing to 49.60% per year by my measurement. My measurement, which uses high frequency data and the use of purchasing power parity theory, is more than four times Turkey’s official annual inflation rate of 11.89% per annum. The charts below show the collapse of the lira and Turkey’s annual inflation rate since January 1, 2020, respectively.

Whenever Erdogan feels the heat, he looks for a Turkish six-man bureaucrat, but that won’t change the course of the lire or curb the spike in inflation. To save the lira and the Turkish economy, Erdogan must change Turkey’s foreign exchange regime, not its bureaucratic staff.

All Erdogan has to do is follow the instructions for establishing a gold-backed currency board that are contained in my book. Gelişmekte Olan Ülkeler İçin Para Kurullari, which was released in Ankara in December 2019.

A Monetary advice is a monetary institution (or set of laws governing a central bank) that issues a freely convertible domestic currency at an absolutely fixed exchange rate with a foreign anchor currency. Under a currency board arrangement, there is no capital control. The national currency, which is issued by a currency board, is backed 100% by anchor currency reserves, so the local currency is simply a clone of its anchor currency.

For more than 170 years, currency boards have had a perfect balance sheet. In total, there have been over 70 – none have failed. Even the Northern Russia currency board, designed by John Maynard Keynes in 1918 during the Russian Civil War, has never wavered.

To make the Turkish lira as good as gold, Erdogan is expected to announce that Turkey will install a gold-backed currency board. With a Turkish currency board, the lira would be linked to gold at a fixed exchange rate, and the lira would be fully backed by gold reserves. Gold is particularly attractive to countries like Turkey because it is not issued by a ruler and is highly revered by Turks. Thus, like gold, the lira would become an international currency that would retain its purchasing power over time. Indeed, reading it would be as good as gold.

If Erdogan is to save the Turkish pound and the Turkish economy, he has to go looking for gold.

Steve H. Hanke is Professor of Applied Economics at Johns Hopkins University in Baltimore. He is a senior fellow and director of the Troubled C Currency Project at the Cato Institute in Washington, DC.

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