Tbf, Erdogan's Islam excuse was bullshit. He kept interest rates low because his family has a controlling interest in construction companies in Turkiye.
The company that built Istanbul Airport and runs IGA are run by relatives for example [1] and instigated their conflict with the UAE after Emaar "stole" the Bucharest (edit: Belgrade) Waterfront redevelopment from them [2]
Turkiye has so much potential. If only the political class wasn't so shit. It can actually become a first world country in 10-15 years if an IMF regime is forced on them.
[2] - Met a businessperson working on that tender at IST. Good conversation. I'll never say no to an excuse to expense Yeni Raki (edit: Tekirdag Gold).
We don't have to rehash the whole reasons here, Wikipedia already spilled endless pixels arguing both viewpoints, with the expected culture war arguments and colorful comparisons that keep those discussions spicy
Do whatever you want. Let's just not derail every thread when you see someone on the opposite side, we know how that ends
Actually, I thought this was really classy of them to actually announce/ask the world that they would please call them Turkiye.
Doesn't bother me - but I thought it was interesting that they actually asked.
I have a light interest in the etymology of naming of places and countries. There was a really interesting book I perused in a book store, which was the origin of place-names for all places in California. 90% of place names are by the first/most documented land owner.
Lots of airport codes are named after the original farm fields that were used as strips, and those were named after the farm/land owners. (or after pilots who died)
There are a couple other "california place names" but this was the one I skimmed in a "how to read a book" fashion, so I managed to retain quite a bit from it.
That has less to do with Erdoğan specifically and more so with colonialism or, more precisely, reckoning with it.
A lot of countries and people, in particular ones that were colonized, are known by exonyms. Names chosen/given by outsiders.
In some cases, these names don’t even make sense, or they might even be pejorative.
So, in recent years, there’s been a push to use the names chosen by the people to whom it pertains. If only as a recognition of self-determination.
Türkiye, while not necessarily being subjected to colonization, capitalized on this by virtue of Erdoğan putting out a diplomatic request to other countries to be called Türkiye, and pretty much everyone acquiesced.
In his case, it was more a matter of pride and annoyance that Turkey was a homonym of the name for the Thanksgiving bird[0].
So, all in all, I’d say it’s a good development, even if, in Türkiye’s instance, it’s for less noble reasons.
Quick fun facts:
1) while the US State Department accepted the change in spelling, they’ll still use the English pronunciation[1]
2) The Thanksgiving bird is named differently in various languages after the country/region the speakers of that language thought it originated from; e.g., Turkey in English because they thought it came from Turkey, Hindi in Turkish, and Kalkoen in Dutch respectively named after “Hindistan” (Turkish for India) and Calcutta, etc.[2]
You can romanize it however you want, "Turkiye" is what diplomats use in order to be diplomatic. I'm sure if the CCP asked for "China" to be romanized as "Zhongguo" in official communication then they'd oblige just as well.
How a country is called in a given language has complex, often historical causes[0], if not merely phonetic. In Europe alone, the names of other European countries given by various European languages often departs from the name countries use themselves.
Why you chose to assume the worst of someone and make a baseless accusation of racism, I don't know, but it isn't charitable, and frankly, the accusation sounds ridiculous.
[0] One of my favorites. Consider that in Polish, Germany is called "Niemcy", which ultimately comes from the Protoslavic word for "foreigner", which itself comes from "mute one" ("niemy" in Polish). Compare this with "Słowianie" (Slavs) from "słowo" ("word"), thus those whose speech is intelligible to us, versus those whose speech isn't (compare this with the Greek etymology for "barbarian").
In Islam there’s no “low interest is ok, high interest is not”, interest is not allowed period.
Not that that has stopped capitalism in Islamic countries, they just restructure it in a single fee and call it a “service fee”. Often done in a similar way that US lenders do with products targeted at riskier demographics: borrow $10k with a $2k fee, customer receives $8k.
And yes, lots and lots of nepotism in Erdoğan’s Türkiye.
Yep! Just introducing the fact that Erdogan basically contorts Islam for personal political gain to people who don't realize (or forget) it. Plenty of foreigners have a weird conception of Turkiye.
> they just restructure it in a single fee and call it a “service fee”
Yep! One of my buddies who I studied with wrote their PhD thesis on the intricacies of "Islamic Finance", which is primarily used as a way to launder money out of Iran via Turkiye, Qatar, and Malaysia.
My layman understanding: raising interest rates is supposed to slow down businesses from growing as fast. The way businesses often respond is by downsizing the workforce. So then you get inflation that’s still high + high unemployment: not a great recipe. Does anyone with a background in economics have more insight into this?
Raising interest rates slows business expansion. It limits new investments by making borrowing more expensive - and borrowing is often an ingredient of business expansion. (In the case where inflation was high because businesses were over-ambitious)
Businesses downsize the workforce either (1) because they are in difficulty already, (2) or because they expect a contraction in their business and want to be better prepared, (3) or because they now doubt that their earlier bold plans will work out.
Raising interest rates is often done too late, too much, and too long - which then starts an economic contraction. A "soft landing" is rare so some businesses take measures in advance of that contraction.
But normally interest rate increases are because the economy is expanding too fast (which causes price inflation) - normally that's a low unemployement time. Business response will raise unemployment a little but not much. What WOULD raise unemployement significantly is a contraction because interest rates stayed high too long. An oil shock is a different kind of beast: you get price inflation even though there wasn't excess growth.
Still... 42% is a signal things are out of control. At that stage are businesses still borrowing at all? So will this increase have much effect?
> So then you get inflation that’s still high + high unemployment: not a great recipe. Does anyone with a background in economics have more insight into this?
It was not 'supposed' to happen in (original/early) Keynesianism, but it occurred in the 1970s in the US, which led some folks to declare Keynesism dead/invalid. People thought about it and analyzed it some, and by the end of the 1970s models were updated with a better understanding of the mechanisms, and every text since about 1980 goes over the details.
Afaik, the intent of raising central bank interest rates is to shrink the effective money supply (forget which M* this is).
It does this by raising the interest rate charged on newly originated loans (why loan at less than the central rate you could get for depositing?), which results in fewer loans (low-return opportunities no longer feasible to finance), which decreases the effective money multiple (due to fractional reserves, availableToLoan:deposited ratio).
On the one hand, this supports the value per currency unit, as less currency chasing same number of goods.
On the other hand, it can decrease net economic activity and blunt its own intent, as you note.
At the end of the day though... it's extremely difficult to run a functioning economy with persistently high inflation. See also: Argentina. So, paraphrasing the new Argentinian president's words, 'This needs measures that will make things worse before it gets better.'
In economics, everything affects everything else, so you are trying to solve for the equilibrium. For example, high unemployment (not the only immediate effect) in turn will reduce consumption either directly due to loss of income or anticipation of it.
You've got it. Low interest rates spur the economy by letting companies borrow cheaply to expand their business. That's supposed to combat unemployment, but at a cost of high inflation, since there's more money.
So, conversely, you can combat inflation by raising interest rates.
But that's only one cause of inflation. If your economy is unproductive, or if the costs of your supplies go up, then prices will go up regardless of what your interest rates are.
That was what happened to the US (and elsewhere) in the 1970s. Oil prices skyrocketed, and that raises the price of literally everything. Fewer goods were purchased, so companies reduced staff, raising unemployment. Unemployment + inflation is called the "misery index", and it's not easily fixed just with monetary measures.
The US solved that in part by government debt. The government is the "borrower of last resort". It can pump money into the economy even when interest rates are high. That will eventually cause inflation but can also break the cycle of price rises and firings. People buy stuff despite high prices, more workers are hired, and eventually the economy reaches a new equilibrium despite the higher price of supplies.
Correct me if I'm wrong, but my layman's understanding is that not all inflation is equal.
Raising interest rates is useful to lower inflation when inflation happens on the demand side of things no? By making money more "expensive" it reduces the money in general circulation.
Does it also work when the inflation comes from the supply side of things? Like, a war or natural tragedy that causes a certain commodity to spike in price due to low availability?
TL;DR this is a complex topic - however at the edge, you can always raise interest rates to the point there is a recession/depression. People will stop buying homes, businesses will stop investing, companies will go bankrupt. Once this process continues for long enough and with sufficient magnitude, inflation will stop - this is effectively what happened in the early 80s in the US. There is always a prevailing interest rate which achieves the goal of stopping inflation.
The little understood con of interest rate based management of the economy is how much the economy adapts to the interest rate cycle. There are businesses that are less sensitive to interest rates - and there are businesses which can leverage parts of the cycle to benefit from policy depressed rates. It's not necessarily a good thing for the economy to be structured around a policy tool.
Note: Just an interested observer of economics - not a trained economist.
Another layperson here. Yes, higher unemployment is certainly a possibility. But with higher interest rates, it’s not just businesses that are affected. It’s anyone who needs credit for any purpose (buying a home appliance, buying a home, buying a vehicle, wanting to study at a university that one cannot pay for immediately, etc.).
At a fundamental level, the target is consumption and the aim is to reduce it. Inflation is when there’s more money but lesser availability of goods and services that people want. So you either have to increase the production of (or import of) goods and services or reduce the amount of money in circulation. Central banks can only do the latter. The former is the responsibility of the executive and legislature to do with policy measures (short term, medium term, long term) on local and well as the international trade fronts.
Coming back to unemployment, it will likely rise. It will have a spiraling effect on other things (people going broke, loans being defaulted, etc.).
If you’ve read about all the developed countries targeting high inflation, and in particular what the U.S. Fed has been doing, there’s been a lot of talk about a “smooth landing”, which implies that the interest rate hikes will gradually bring down inflation without causing a big decline in GDP growth and related effects. This is mostly a fantasy because in reality nobody has figured out how to get other people, i.e., an entire population, to do something in unison.
While interest rates control ease of access to money, central banks can control the amount of money available through various mechanisms (liquidity control in banks, reserve requirements, etc.). Interest rate increases require time to show up in their effects (several months or quarters). Other measures can have a quicker impact. Businesses, especially larger ones, will have access to bind their effective interest rate to lower values for longer. So these changes won’t show up uniformly everywhere.
All said and done, central banks are typically (IMO) powerless in handling inflation or deflation. Without other policy decisions and policy actions (local and international) by the government, there’s not a lot that central banks can do without inflicting too much damage and getting into a whiplash reaction when things spike out of control.
Downsizing the workforce leads to lower inflation (fewer people spending money on a supply of goods and services that are relatively fixed in the short run.)
Longer answer: what you are interested in is called the “transmission mechanism”, and the reduced workforce (and also investment by businesses) is only a part of it. The main part of the transmission mechanism is consumption: when interest rates go up, saving becomes more attractive and people shop less, preferring to spend later. They also face lower asset prices (did you notice how all bonds lost value over the past year? that's what it is) and so choose to spend less.
The inflation-unemployment trade-off that you mentioned is also a part of it. All economists know that there are trade-offs between policy goals, and you have to make judgement calls about what the society's priorities are. If only the voters could vote on “2% lower inflation compared to now” vs “1 percent lower unemployment compared to now”. For better or for worse, they don't do that.
The transmission mechanism is not actually via raising interest rates in any real sense, it's by draining money from the economy - selling assets for money, and then retiring that money. This leaves economic actors with lower money balances than they wish to hold at the given level of nominal spending (price level × real activity) which in turn incents them to spend less in all kinds of ways. Which then leads to lower expectations of the future price level (as well as future real activity), which works to reel in the inflationary spiral.
Interest rates play little to no role in this specifically, and actually they are a lot more complicated because policy interest rates are set according to a liquidity effect (more money = lower rates) but natural or market rates move according to the Fisher effect (more money = more nominal spending in the future, thus higher interest rates!). Setting policy interest rates for any length of time thus always involves trying to achieve stability in an inerently unstable fashion, akin to balancing an inverted pendulum. It's not worth worrying too much about those.
FWIW, around a month ago I researched how to open a Turkish bank account in order to benefit from the high interest rate level by depositing some money there, but I had to give up. It seems to be hard to impossible for a non-resident.
(The OP talks about central bank rates and a recent increase, but consumer banks have had accounts with high rates (relative to other investment alternatives) for a long time. Just nowhere as high as this.)
Lira obviously. There used to be a Lira savings account scheme which was protected against FX risk by the government to encourage savings in Lira but I believe that's no longer offered.
turkish lira, venezuela month before a the hiper inflation and total default risk have 30% in dollars.
42% is dumb the inflation 42.5% so probably banks are making bucks here taking debt under inflation rate and lending over it, like happens in aregentina betwen 2008-2014.
So Erdogan finally admitted his economic theories of keeping interest rates low are complete garbage. One would think that after years of causing massive damages to the Turkish economy a president should resign, being proven wrong time and time again.
Interest rates were intentionally kept low after the pandemic to let wheels running. Erdogan had an election to win and made "interest is forbidden in Islam" as a slogan for economic policy and also lower rates was good for unemployment, which is good for elections. Also you can't just say "we'll devalue the currency in your pocket so you'll be poorer but this is necessary to make industrial exports to be competitive with China" to your voters.
The new plan after the election is single digit inflation in 2027. I don't think he will live that long to see it, he's ill, but yeah, it's the usual economics after all.
Tbf, Erdogan's Islam excuse was bullshit. He kept interest rates low because his family has a controlling interest in construction companies in Turkiye.
The company that built Istanbul Airport and runs IGA are run by relatives for example [1] and instigated their conflict with the UAE after Emaar "stole" the Bucharest (edit: Belgrade) Waterfront redevelopment from them [2]
Turkiye has so much potential. If only the political class wasn't so shit. It can actually become a first world country in 10-15 years if an IMF regime is forced on them.
[0] - https://www.bloomberg.com/news/articles/2021-12-19/turkey-s-...
[1] - https://mapa.group/our-projects/
[2] - Met a businessperson working on that tender at IST. Good conversation. I'll never say no to an excuse to expense Yeni Raki (edit: Tekirdag Gold).