The Magazine for Asian Investors
“The closer the collapse of an Empire, the crazier its laws.”-MARCUS TULLIUS CICERO
The wild lira roller coaster ride is entering a new round, and the long-term outlook for citizens is not good. Inflation in Turkey has already risen to more than 20%, giving holders of the Turkish currency lira no good feelings about holding their currency. The lowest point so far was the record low of 18.4 to the U.S. dollar. The Turkish currency has thus lost almost 60% this year against the world benchmark, the U.S. dollar.
Now, Turkey’s President Erdogan will introduce further measures to combat the collapse of the lira.
His plan: the government will guarantee lira deposits against a currency devaluation that exceeds the deposit rate. To that end, he said, “We are offering a new financial alternative to citizens who want to reduce their worries about the rise in exchange rates when evaluating their savings.” In addition, the minimum wage will be increased by 50%.
However, it remains completely open how this is to be done.
The lira rose 43% against the U.S. dollar after the statement and stood at 12.05 at the time of this writing.
How did it come to this?
The keyword, as so often, is policies.
Turkey continues to keep interest rates low despite runaway inflation. With low-interest rates comes more cheap currency into circulation which will put further pressure on the currency. With inflation running away, people are forced to increase the velocity of their currency, i.e. are forced to spend it immediately when they receive it because they do not know how much purchasing power the received currency will have tomorrow. Some traders have already abandoned the lira, which is the first step towards the death of a currency. Fiat currencies have no intrinsic value, but get their value from the fact that people believe that this currency will buy goods and services tomorrow, so purely dependent on people’s beliefs.
As if that were not enough, the government has summarily removed central bankers who were of a different opinion. This shows that one does not have much value on differentiated opinions. This phenomenon can be observed at the moment in many western countries of this world that people with different opinions than the mainstream opinion are no longer welcome.
Now the artificial increase of the minimum wage does not come from anywhere. An increase in the minimum wage that is not due to an increase in economic output will probably have a negative impact in the long term. Employers who are now faced with higher costs will sooner or later pass these costs on to consumers, which of course will cause prices to rise even further.
We will see how the political decisions develop further, but here again, the quote of Marcus Tullius Cicero fits: “The closer the collapse of an Empire, the crazier its laws.
Nevertheless, this can serve as an example of what government interference in the market economy can mean. Throughout history, governments that have interfered in the economy have never made anything better. If you look at the structure of governments from the outside, you will see that governments do only two things:
- raise taxes
- spend currency (almost always more than they take in)
Politicians are neither business owners nor have they studied currencies.
On the other hand, history gives currencies a 0% chance of survival. This means that every currency dies and none has survived the test of time. And when the chaos occurs and the currency dies, people go back to what has existed for thousands of years: Sound Money.