Satisfied, anxious, and pessimistic economists

Hot money is pouring into Turkey from abroad. The dollar is not rising; in fact, it is falling. The government wing, led by Mehmet Şimşek and his team, is satisfied. The pro-government media is over the moon. They are hoping to experience a new “Tulip Era” with fairy tales that “inflation will fall along with the dollar. Turkey will soar.” Capital and financial market economists, who expect to make money from money rather than through production, are optimistic.

Just like the “Anxious Moderns” of the past, who failed to realize the danger of political Islam and believed that AKP and Erdoğan would bring democracy to Turkey, there are now “Anxious Economists.” Friends in this group are aware of the problems that hot money will cause when it leaves, but they still hold onto the hope that the AKP will implement correct economic policies despite what has happened over the last 22 years.

As a “Pessimistic Economist,” I will record my views in light of what has happened over the last 22 years.

Under the economic conditions Turkey is experiencing, there is no “what if” regarding the destruction that hot money will cause when it leaves. We are not talking about a reasonably priced financing movement that will turn the wheels of the economy. We are trying to catch our breath with loan-shark interest rates. It is like giving drugs to a drug addict in the final stages to soothe their withdrawal seizures, or to a patient in the grip of an incurable disease to ease their pain...

A small minority will make money from money and be happy, and a temporary relief will be provided, but the society as a whole will become even poorer, the production power and competitiveness of the Turkish economy will decrease even further, and the debt trap we are in will become even heavier.

TODAY, YESTERDAY, AND TOMORROW…

Turkey is a indebted country with a foreign deficit due to years of wrong choices, poor management, and structural problems... We are not making the radical changes that would eliminate these diseases. We are struggling to get money from outside. As stability in the economy, law, and politics deteriorates, direct investment does not come. The costs of finding foreign debt are rising. In times of desperation, we suppress and fix the exchange rate. Because of the fixed exchange rate and increased interest rates, we wait for hot money to come to Turkey and for plenty of foreign currency to enter.

Minister of Treasury and Finance Mehmet Şimşek announced at his party's group meeting the other day that 54 billion dollars of hot money has entered Turkey in the last 1.5 months. But he immediately expressed his concern as well: “We cannot rely solely on hot money. We also need direct foreign capital inflow.”

Yes, it is needed, but for direct foreign capital inflow, we need law and stability. Furthermore, foreign capital needs to be directed toward production and exports, not speculative areas.

We experienced the temporary relief caused by hot money between 2003 and 2009. We have not forgotten how hot money destroyed the economy in Turkey when it left afterward. (Although some still appreciate that period, let us record our objections again.)

The harms of hot money are as follows: When foreign currency is abundant, inflation is brought under control. But because of cheap foreign currency, imports also become cheaper. Farmers and industrialists lose their competitive power, give up on producing, and turn to imports. There is an abundance in the market with cheap imports, and a temporary relief is provided in inflation. We experienced this period between 2002 and 2009. It was the AKP's Tulip Era, the period the nation described as “They steal, but they work.”

To meet the increasing imports, we start borrowing more this time. While 3-5 percent interest is paid on the dollar in world markets, we pay 15-20 percent interest. We are transferring resources from within the country to abroad. The maturity date arrives. World conditions change. Hot money leaves as quickly as it came.

When hot money is withdrawn, what remains is a country that has lost its production and competitive power in agriculture and industry, has an increasing army of unemployed, has seen inflation skyrocket again, has become increasingly dependent on foreign production, has seen its debt increase instead of getting richer as it produces, is stuck in a foreign debt trap, and has become increasingly impoverished.

Because hot money is withdrawn, the exchange rate skyrockets. Since production does not increase, inflation also increases. Because of inflation, the rising exchange rate does not provide a remedy for the exporter; to increase the competitive power of the exporter and the industrialist, we slash worker wages. In the name of fighting rising inflation, we reduce the purchasing power of low-income earners. We spread poverty and misery and further worsen income distribution in society. Meanwhile, our foreign trade deficit and the foreign debt we will pay each year continue to increase, and we become like a drug addict in crisis, searching for hot money. Within this vicious cycle, we struggle in an even deeper debt trap every time.

THIS TIME IT WILL BE WORSE…

Turkey got involved in this hot money trouble in the 2000s. First, the IMF suggested a currency peg instead of its usual devaluation policies. The IMF would provide plenty of foreign currency, Turkey would keep the exchange rate fixed, and thus inflation would be brought under control. The exchange rate was suppressed. Turkey was supposedly implementing a floating exchange rate policy, but due to the currency peg, the exchange rate remained fixed. It needed an excuse to explode. As a result of a discussion that had nothing to do with the economy, the exchange rate skyrocketed, and Turkey entered a currency crisis again. (The Constitution booklet issue between the President of the time, A. Necdet Sezer, and Prime Minister Bülent Ecevit)

This time, Kemal Derviş came to get out of the crisis. With the support of the IMF and the World Bank, he implemented the Transition to a Strong Economy Program along with a hot money policy. The program was designed for two or three years... When Bahçeli called for early elections, the program spilled over into the AKP government. The AKP government also got a taste of hot money. It continued with low exchange rates and high interest rates. It dragged the economy further into unproductivity and a debt trap.

We should learn this lesson from here: If you suppress the exchange rate, the exchange rate will eventually find an excuse and explode. In Turkey, the exchange rate has been below inflation for the last 2.5 years. Such a moment of explosion is not expected for the next 3 months and perhaps 6 months for now. (Unless other abnormalities occur.) But what happens after is unknown.

It seems to me that the destruction of the hot money leaving this time will be heavier than the previous period. Why, you ask?

In 2000, behind the fixed exchange rate policy and the 2001 Kemal Derviş Program, there was IMF and World Bank support and low-cost foreign currency loans provided by these two institutions. Now there is no such support. Turkey cannot find loans from abroad at reasonable interest rates. Costs will be higher.

When the AKP government continued its hot money policy after 2003 and especially 2004, the conjuncture of the world and Turkey was very different from today. There was a tremendous excess of liquidity in the world, and hot money was looking for a country to go to. In addition, the new AKP government had the full support of both the US and the EU. Stories of Turkey's full membership to the EU were being pumped, and with this atmosphere, Turkey was receiving more Foreign Direct Investment than it had ever seen in its history. This atmosphere of capital abundance, which started in 2003, lasted until the international financial crisis that erupted at the end of 2008. Turkey benefited from this atmosphere for 6 years. The fact that the foreign direct investment that came during this period was not used in productive areas is another problem.

Today, Turkey's relations with the EU are going through the worst period in their history. Let alone full membership, even businessmen cannot get visa appointments. Due to reasons such as the turmoil in the Middle East, Turkey's deliberate and willing positioning of itself as a Middle Eastern country in foreign policy, the one-man regime, and lawlessness, foreign direct investment is not coming to Turkey. Not only is it not coming, but some of it is packing up and leaving. It is not just foreign capital that is leaving. Domestic capital is also slowly fleeing abroad.

Conditions today are quite different from those between 2003 and 2009. Today, hot money has come to Turkey for the sweet profit it sees. But for now, there is no reason to expect a long 5-6 year flow of Hot Money and Foreign Capital as it used to be. I cannot predict how long this artificial abundance will last. The financial world thinks in three-month terms. You should make your estimates accordingly. Within three periods... Should I say three months, six months, or nine months... One and a half months have passed.

What is certain is this... As a result of the hot money wave, the broad masses of people without savings will become even poorer. Those with savings will add to their earnings if they watch the last station and the last carriage of the train well. Those who try to board the train in the last carriage and get off at the last station will be disappointed. Of course, the main question is: Which is the last carriage and where is the last station? There is no clear answer to this question. I will discuss this on my YouTube Channel.