The hard part is over! The public is going to suffer greatly

Treasury and Finance Minister Mehmet Şimşek delivered the following messages in a speech during a TV program last week:

“The hardest part is behind us… We will bring inflation down to single digits for permanent prosperity growth… Our reserves have increased, and our external vulnerability has decreased. Foreign borrowing opportunities have improved…”

According to the goals of Mehmet Şimşek and the government, the hardest part may indeed be over. But for the citizens, even harder days await us. Let us make some observations without going into too much detail.

During the AKP era, including the 2003-2016 period which they claim was their most successful, the economy's dependence on foreign sources and its vulnerability to external shocks increased. Turkey lost its production and competitive power. The country has turned into a semi-colonial state, much like in the final period of the Ottoman Empire.

A massive income distribution crisis occurred. Income and wealth were transferred from the poor segments to the wealthy and abroad. When the crazed policies of enriching cronies were combined with 'nas' (religious-based) policies, 80 percent of society was pushed below the poverty line. The wheels of the economy came to a standstill.

External financing costs skyrocketed. The current account deficit reached 50 billion dollars. Central Bank reserves exceeded minus 50 billion dollars. The Palace administration's top priority became finding money. In addition to asset sales, the country's geopolitical power, especially regarding the refugee issue, was marketed in exchange for short-term monetary gains.

The country was rapidly rolling off a cliff toward bankruptcy. If the wheels stopped and the country reached the point of bankruptcy, the Palace would not be able to find money, nor could resources be transferred to cronies and parasitic sects. Just like killing the goose that lays the golden eggs…

Mehmet Şimşek's task was to find external resources for the Palace's expenses and ensure the wheels of the economy kept turning. Looking at the policies on distribution and the fight against inflation, the goal of restarting the economy's wheels is not to increase the welfare of society. It is to restore the order that will transfer resources to them. To keep the goose that lays the golden eggs alive.

THE FARCE OF FIGHTING INFLATION

From this perspective, yes, the hardest part is over. Turkey's external vulnerability has decreased, and the Central Bank's reserves have increased. On the horizon, there is no currency crisis in terms of repaying foreign debts. The Palace can find money more easily. However, the bill for this will be very heavy for those with low and fixed incomes.

For one thing, inflation is not falling permanently. Although a decline in annual inflation is seen due to the base effect as the very high increases from July and August of last year are removed from the calculations, we will still experience a process of high monthly inflation.

We said that inflation would not fall with this mindset. And it won't. Inflation does not fall with interest rates alone. Fiscal policies are also required. One pillar of fiscal policy is to prevent tax loss and evasion, and the other is to stop corruption and extravagance in the public sector…

As examples of corruption, we can point to tenders, guarantees paid to highways, bridges, and airports, and resources transferred from public banks, wealth fund companies, and AKP-run municipalities to parasitic sect foundations.

As for extravagance, I don't know if examples are even needed. Planes, convoys, the planes and cars used by the head of the Diyanet, ministers, high-level bureaucrats, governors, and even their spouses and children, invitations, dining and drinking, domestic and international trips under the guise of inspection and training—the list is endless…

The savings and efficiency package announced by Mehmet Şimşek has nothing to do with savings. It is merely an operation designed to put opposition municipalities in a squeeze. There is no need to explain at length. In the January-August period, the budget deficit was 383 billion liras last year. This year, it increased 2.5 times to 973 billion liras. Is this savings? Is this fighting inflation?

THE IMPACT OF THE WEALTHY AND THE INFORMAL ECONOMY ON DEMAND GROWTH

Mehmet Şimşek and the Central Bank are also unable to make accurate assessments regarding the causes of inflation. They say, “Do not give large raises to the minimum wage and retirees in order to curb demand.” We have said repeatedly that it is not the demand of minimum wage earners and retirees that is causing demand to explode in Turkey. A kilo of lamb chops and sirloin has reached 1400 liras. Are minimum wage earners and retirees eating sirloin and lamb chops? There are two segments in Turkey that are causing demand to explode. One is the top 20 percent of the population by income (approximately 18 million people), who receive 50 percent of the total income. The purchasing power of the 80 percent is falling, and their physical consumption is declining. The demand of the 20 percent needs to be curbed. The other segment is the informal economy and black money… There is an informal economy and black money in Turkey whose scale we do not even know. (According to some, it is about one-third of the national income.)

There is a segment that appears to do no work, whose sources of wealth and income are unknown but who spend like crazy, and there are public officials and political figures who benefit from this segment. We said, “Deal with their demand for luxury consumer goods, land, and housing.” For a while, they dealt with a handful of people described as social media influencers; they arrested them first, then released them. They couldn't go deep.

Finally, wedding news from Van shows us the scale of the informal economy. The bride and groom were gifted 21 million liras in cash and 2 kilos of gold, totaling 27 million liras in jewelry. Meanwhile, Van is last in Turkey in per capita national income at 3275 dollars… In 2023, the total declared income tax in Van, including temporary tax, was 99 million liras. The jewelry at one wedding is one-third of the income tax the state collected in a year based on declarations. I am certainly not accusing those who attended this wedding or the hosts. There may have been people from outside Van, and I am sure those who gave the jewelry are owners of legitimate, tax-paid earnings. I just compared the money collected at one wedding with the tax the state collected in a year.

Indeed, Turkey's import data also confirms our view that the high-income group is not curbing its demand. While imports of investment goods and intermediate inputs fell in the first seven months and Turkey's total imports declined by 8 percent, luxury consumer goods imports increased by 15 percent. Who is earning this money, where are they earning it from, and how much tax are they paying?

WHICH ECONOMY CAN WITHSTAND 40 PERCENT INTEREST ON THE DOLLAR?

We are the country that gives the highest real interest rate on hot money. While currency prices are kept almost stable, we are giving 50 percent annual interest. Those who bring hot money to Turkey from abroad are earning 40 percent annually in real terms. When dollar interest rates are at the 4-5 percent level globally, of course you will find foreign currency with 40 percent interest. Of course, you will increase your foreign currency reserves. But which economy can withstand giving 40 percent in real terms when dollar interest rates are at 4 percent globally? Market actors say that about two-thirds of those bringing hot money from abroad are Turks who have moved their money out, and about one-third are foreign funds. A handful of people are getting rich. Wealth is being transferred abroad. More than 80 percent of the population is becoming impoverished.

Who will pay for this transfer of resources and wealth abroad? The answer is clear. When the hot money is withdrawn and leaves at the end of the period, there will be another major currency problem, higher inflation, and a heavier bill for the low-income earners…

INFLATION – PRICE INCREASES – COST OF LIVING

According to Mehmet Şimşek, the hardest part is over, but inflation will not fall permanently. With TÜİK's inaccurate inflation announcements, the purchasing power of low-income earners will decline further as it does every year, and the cost of living will increase even more for them.

Almost everyone is declaring themselves an economist. In such an environment, it is useful to explain some concepts in a simple language that everyone can understand to avoid misinformation.

Inflation: It is the increase in the general price level. It is measured by the change in a basket that reflects the average consumption of households (society, consumers).

Inflation does not show the general price level, but the change in that level. Imagine a basket containing all your needs. Let the value of this basket be 100 liras. If inflation is 80 percent, the total value of all goods in this basket rises to 180 liras. The following year, inflation falls to 50 percent. Inflation has fallen, but the total price of all goods in the basket has increased by another 90 liras, becoming 270 liras. While inflation was falling from 80 percent to 50 percent, another 90 liras of price hikes were added in the second year on top of the 80-lira increase in the first year. The general price level became 270. The total two-year inflation reached 170 percent.

Cost of living: If your income does not increase as much as inflation, you become poorer and experience a high cost of living. If your income increases more than inflation, you become wealthier.

As a result of the calculations I made based on ENAG inflation for the period from January 2020 to mid-June 2024 in Turkey, low-income earners in Turkey experienced a very severe cost of living.

In the last 4.5 years, they have confiscated 66 percent of the minimum wage, and if we calculate based on wheat, 71 percent of farmers' incomes. The situation of retirees is even worse. The purchasing power evaporated in the retiree salary, which is below the minimum wage, is 69 percent. Previously, retiree salaries were 40 percent higher than the minimum wage. If we calculate from that level, they have stolen 80 percent of the retiree's purchasing power. (I wrote the details in 12 Punto on July 7. I am sharing the link to the article for those who are curious.)

https://12punto.com.tr/yazarlar/meric-koyatasi/tuik-marifetiyle-emekli-ayliginin-yuzde-86sina-asgari-ucretin-yuzde-66sina-el-koydular-43294