They found an unorganized society and a sheep-like opposition...

The opposition should have raised hell over the Central Bank Governor's press conference. Since there was no sound from them, it fell to us, as many economists as there are, to write and speak about it. Readers get bored with long articles. However, the topic is current and cannot be brushed aside briefly. Let us list the parts of this long article one by one, and not lose the reader in the comfort of Sunday.

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• For the new Central Bank Governor, Mehmet Şimşek had said, "He is a very good macroeconomist, I vouch for him." As far as I understand, he may not be a macroeconomist, but he could be a good customer of the Makro Market chain. Or he is deliberately misleading the public.

• Central Bank Deputy Governor Cevdet Akçay accused the President and former minister Nebati of ruining everything by saying that the links between interest rates, inflation, and exchange rates have broken. What does it mean for the links to be broken? After destroying even the measurement function of the dollar, how can stability be achieved in the markets?

• They stole the money of minimum wage earners right before our eyes. They still point to the minimum wage as the reason for inflation. Despite the 2024 raise, how much of the minimum wage earners' money have they evaporated in the last year? Everything is summarized below...

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Central Bank Governor Fatih Karahan, in his press conference with his deputies, had declared minimum wage earners and people who burned more than 25 cubic meters of natural gas during these winter months as the culprits and scapegoats for inflation. The real bombshell exploded during the Q&A session. Deputy Governor Cevdet Akçay, despite no questions being asked about the most sensitive issue, took the microphone. He asked himself a question and answered it:

"The link between the average monthly funding cost and deposit interest rates has broken. The link between the policy rate and inflation has broken. The link between interest rates and exchange rates has broken. We have been re-establishing these broken links for seven months. Rather than changing the year-end inflation target, it is more meaningful to implement measures that will bring us closer to that target."

What Central Bank Deputy Governor Akçay said had been stated by every sane economist in the country for more than two years. With these statements, Akçay unhesitatingly accused former minister Nureddin Nebati, the former Central Bank Governor, the current Banking Regulation and Supervision Agency (BDDK) Chairman Şahap Kavcıoğlu, and of course, President Recep Tayyip Erdoğan, who gave the order to implement these policies, of "ruining everything."

BROKEN LINKS AND THEIR COSTS

They said they would re-establish the broken links, but this will not be possible. First, let us recall what the broken links are and what we have been saying for more than two years. Let us consider the statement that the links between funding costs and deposit interest rates, the policy rate and inflation, and interest rates and exchange rates have broken, all together.

Banks were offering deposit interest rates far below inflation, and interestingly, they were distributing loans with interest rates also far below inflation. With KKM (FX-Protected Deposit Scheme), the most absurd instrument ever invented in the history of world finance, we subsidized both the banks' funding costs and everyone who used loans with interest rates far below inflation. How did we do this? Even though it was not a debt taken by the state or the public, we financed it by paying KKM holders interest under the guise of exchange rate differences from the Treasury and the Central Bank, but in reality, it was pure interest.

We are talking about a magnitude exceeding 1 trillion liras, with a cost to the Treasury of 1.5 trillion liras including tax exemptions. This deficit both created inflation and transferred wealth from the entire society to the segments we listed above. The link between funding costs and bank deposit interest rates broke, but bank profits skyrocketed to an incredible extent. So what else happened? We also sold over 200 billion dollars in foreign currency through the back door to suppress the exchange rate. We broke the relationship between the exchange rate level and inflation.

THEY EVEN DESTROYED THE DOLLAR'S MEASUREMENT FUNCTION

Only exporters are complaining. The real disaster is the breaking of the relationship between the exchange rate and inflation. It does not just make exports difficult and encourage imports. It stops all the working gears of the economy. I am ashamed to explain these things to those who manage and direct the country's economy, but let us repeat them. We will return to the introductory course on Monetary Theory. What is money? It has three basic functions.

The medium of exchange function. The Turkish Lira's function is valid within the borders of the Republic of Turkey. When you pay money, you can buy the goods or services you want. This function of the TL is not valid abroad. When you offer Turkish Lira, they look at you blankly. Another function is the store of value function. You do not spend your money; you save it. You also earn interest for the "time value" of this savings. The interest you receive only makes sense if it protects or increases the purchasing power of the money you saved in the future. If you break this relationship, people do not save, they consume, you increase inflation, and you go into more foreign debt for your new investments. The third and perhaps the most important function of money is the measurement function. How much does this good or service cost?

In our country, which has experienced high inflation for many years, the measurement function of the Turkish Lira had disappeared. To sell or buy a product, let alone the long term, it is impossible to even provide a price in Turkish Lira for three months from now. Our economy has ceased to be a single-currency economy and has become a dual-currency economy. The measurement function no longer belonged to the Turkish Lira, but to the dollar. In the capitalist system, the market works through the price mechanism. Consumers, producers, importers, industrialists who will invest, everyone makes decisions by looking at prices. Will the demand for a good increase, will the business world produce that good, or will it not produce it and import it instead?

Whether in a single-currency or dual-currency economy, if you eliminate the measurement function of the money you have assigned this function to, the price mechanism will not work effectively. No one invests. Speculative movements begin, and various bubbles form. In our dual-currency economy, by intervening in the dollar, we allowed the value increase in the dollar to be roughly half of the inflation over the last two years. I did not calculate it with ENAG inflation, but the inflation I measured with the Turkish Lira, which has been neck-and-neck with ENAG for two years, was 129.9 percent in 2023. When I measured the same inflation basket with the dollar, dollar inflation in Turkey came out to 55 percent. After the Turkish Lira, which had long since lost its measurement function, we managed to destroy the dollar's measurement function as well. The result is obvious. Bubbles and speculative pricing emerged everywhere, and we faced something worse than the inflation that would result from the exchange rate rising. A tremendous housing bubble and an automobile bubble formed. At one point, second-hand car prices had become higher than first-hand ones.

There is already no rule of law in our country. This is a source of instability in itself. In addition to lawlessness, the loss of the measurement function of the world-accepted reserve currency within that country is a separate and very effective cause of instability. No one can make economic decisions for the future. They do not invest. The Turkish Lira's measurement function has been lost, and the dollar has replaced it. If its measurement function is also gone, what kind of price stability can you talk about with what kind of pricing? Who will decide based on what?

The bottom line is this: Central Bank Deputy Governor Cevdet Akçay says, "We are trying to re-establish these broken links." Can they be successful in this?

I say with regret, no.

To do this, you need to both lower inflation and stop suppressing foreign currency and allow exchange rates to correct themselves according to inflation (devaluation), and subsequently, you need to increase interest rates according to real inflation. Will you be able to convince the President for all of this? There are also budget and fiscal policies involved that are not under the responsibility of the Central Bank.

WHICH INFLATION?

There is a saying I will never tire of writing and speaking: "If you cannot measure it, you cannot manage it."

The primary goal of the Central Bank is the fight against inflation... That is correct, and that is what it should be. For the broken relationships we mentioned above to become healthy again, inflation must first be brought under control. But which inflation? The 65 percent inflation made up by TUIK, or the 129 percent that reflects the truth by ENAG? I am sure TUIK will meet the 36 percent inflation target of the Central Bank at the end of the year with two strokes of the pen. But what about ENAG inflation? I am maintaining my 140 percent year-end forecast for now, provided that I revise it after May.

The interest rate that the Central Bank says it will not increase for now in the name of fighting inflation is 45 percent, the current TUIK inflation is 65 percent, and the forward-looking inflation is 36 percent...

For an economy where the truth is measured and trust and stability are slowly forming, you can convince people by saying, "I will lower inflation from 65 percent to 36 percent, and look, 45 percent interest is also great." But these inflation data are not real. Let us assume that these inflation data are correct. The Central Bank's diagnosis for the causes of inflation is completely wrong from start to finish. When the diagnosis is wrong, the solution will not be found either.

CAUSES OF INFLATION

Central Bank Governor Fatih Karahan, looking everyone in the eye, said there are three main causes of inflation. The rise in administered prices. (The Turkish translation of this phrase is the hikes the state makes to fuel, taxes, fees, fines, and the resulting increases in telephone, communication, and insurance prices. We used to call this SEEs (State Economic Enterprises) hikes; now we have found a fancy name. Administered prices.)

The second biggest cause of inflation is the increase in the minimum wage above expectations. (A repetition of the anti-labor Mehmet Şimşek rhetoric). At the end of the article, I will prove again how empty this claim is. The third is people consuming more than 25 cubic meters of natural gas to heat themselves in January. They could not starve the low-income people to death, so they are trying to make freezing them to death seem reasonable.

Budget expenditures, black holes in the budget, the 85 billion dollar equivalent KKM nonsense that still stands as a massive burden and black hole on the Central Bank, expenditures transferred from the budget to crony contractors, the 2024 budget deficit, which is targeted at 2.5 trillion liras for now but is as clear as day that it will be much more... They did not mention the effects of these on inflation. For the new Central Bank Governor, Mehmet Şimşek had said, "He is a very good macroeconomist, I vouch for him." As far as I understand, he is not a macroeconomist, but he could be a customer of the Makro Market chain.

WAS CEVDET AKÇAY GOOD?

As for his deputy Cevdet Akçay... His outburst at Thursday's press conference was appreciated by many. Some even said, "The Central Bank Governor should have been Cevdet Akçay." In this article and in the speech I made on my own YouTube channel, I also state that Cevdet Akçay's outburst and warnings were appropriate.

However, since I do not know his views on issues such as real inflation measurement, public spending preferences and the effects of budget deficits on inflation, which segment of society the demand increase that causes inflation originates from, what prevents production growth, and the effects of KKM on inflation, I cannot say, "He is very good, the person who will be a perfect Central Bank Governor."

But I can definitely say this: His caliber is far, far above the current governor Fatih Karahan and the other deputy governor. But if Cevdet Akçay had been the Central Bank Governor instead of Fatih Karahan, his term as governor would have been shorter than Hafize Gaye Erkan's due to this outburst.

HOW MUCH OF THE MINIMUM WAGE EVAPORATED?

Mehmet Şimşek and the Central Bank Governor point to the "higher than expected" increases in the minimum wage as the cause of inflation. Either they do not know how to calculate, or to put it very politely, they are misleading the public due to their political preferences. Mehmet Şimşek and the Central Bank Governor have just arrived, they have turned a new page, right... I am writing only about the last year, 2023.

I had explained it on 12 Punto on Thursday. Let us repeat. The minimum wage was 8500 TL in the first month of 2023, and 11,400 TL for the second six months until the end of the year. The increase rate is 34 percent... The year-end inflation rate is 65 percent according to the makeup-artist TUIK, and 127.11 percent according to ENAG. The purchasing power of the 11,400 TL at the end of the year fell to 5022 TL at the beginning of 2023. I hope there are still employees at the Central Bank who know statistics. (11400/1+1.27 =5022) I said I would explain the details in my Sunday article. Here you go.

I will not go into simple calculations like how much gold a single minimum wage earner's salary could buy, or how much bread it could buy. Let us be more realistic. Let us calculate not through individual prices, but through the general level of all prices. Let us try to explain this in a language everyone can understand.

Let us have a consumption basket. Inside it, let us have all kinds of food items consumed by a poor family, house rent, transportation, heating, mobile phone, health expenses, and the cards we will use for children's school expenses. Let us accept the value of this consumption basket as 100 liras in January 2023. A minimum wage worker earning 8500 liras buys 85 of these consumption baskets in January. When we come to the end of 2023, ENAG inflation is 127 percent... Therefore, the value of the 100-lira consumption basket also rises to 227 liras. The minimum wage was also raised in July, increasing from 8500 liras to 11,400 liras. Let us see, according to Mehmet Şimşek or the new Central Bank Governor, how much demand increase occurred that caused inflation to explode? The total basket the minimum wage earner will buy with 11,400 liras (11400:227) is 50... The minimum wage earner, who bought 85 baskets in January 2023, has seen their consumption decrease by 35 units despite their salary increasing. 41 percent of their salary has flown away.

Let us come to 2024. The minimum wage earner received their raised salary at the end of January. When we look at the end of January, ENAG inflation is 129 percent. So our 100-lira basket became 229 liras. The salary is 17,002 liras. (17002:229) The minimum wage earner buys 74 baskets, not 85, compared to January 2023. Physically, their demand has also fallen from 85 baskets to 74 baskets, and it will continue to fall from the coming months onwards. Their income at the beginning of 2024 has fallen to 87 percent compared to the beginning of 2023, 13 percent has evaporated. If we make this calculation from the beginning of 2022, the situation is even more dire. The amount they consume has fallen, demand has fallen. While the truth stands in all its nakedness, our Treasury and Finance Minister Mehmet Şimşek and our new Central Bank Governor, who also studied excellent macroeconomics at very good universities in the USA, claim that wage increases cause demand increases and inflation.

They have found unorganized, unionless workers, they have found unorganized retirees, they have found a sheep-like opposition, and they are continuing their brutal economic policies that impoverish the public and enrich a small clique as they please. There is much more to be written about the Central Bank's inflation report. For example, what is the fox-like cunning behind the claim that inflation will fall after May? If demand is increasing and fueling inflation, why is production not increasing? Until the next article...