An open letter to Ms. Hafize Gaye: Three subtle messages and one major mistake

Many people have debated and discussed it, and they continue to talk, debate, and interpret it. How could they not? A Central Bank Governor is giving an exclusive interview to a journalist. We have never witnessed a Central Bank Governor in Turkey give an exclusive interview until now. I do not believe there is an example of this anywhere else in the world either. Naturally, it will have repercussions.  

"She couldn't find a rental apartment in Istanbul, so she moved into her mother's house" and "tracking inflation through Sadık, the apartment superintendent" were treated as tabloid news. In reality, behind these two statements lies a subtle jab at both the Turkish Statistical Institute (TÜİK) and the previous economic management, including the President himself. These are the points that should actually be discussed. But one other statement stands out. "How much more will the citizens have to tighten their belts in the fight against inflation?" by saying this, she distances herself from Mehmet Şimşek's harsh policies. We mentioned three subtle messages... and one major mistake.

"It is mathematically absurd that people are not switching from foreign currency to Turkish Lira despite these interest rates." she says. That is where, in my opinion, she misses the mark. 

These are the main points from the Central Bank Governor's statements. I wanted to write an open letter to Ms. Hafize Gaye on these topics. I am sharing it below. 

INTEREST RATES AND THE REAL ESTATE MARKET: It is not my place to lecture a high-level financier like you, but let us recall some basic facts. Due to your busy schedule, I believe you are failing to see the forest for the trees. What are the savings and investment instruments in money and financial markets? They are deposits, treasury and private sector bonds, treasury bills, stocks, investment funds, and derivatives linked to these. The keystone of the system is the interest rate. Before you arrived, such absurd interest rate policies were implemented in this country that most of the savings and financial investment instruments I listed above were rendered obsolete. The most valuable financial savings and investment instrument became real estate. That is why you are surprised that real estate prices in Istanbul are higher than in Manhattan. Do not be surprised. This is one reason. Or perhaps, by appearing surprised, you are indirectly explaining the reality to the majority of society. In that case, I congratulate you.  

DIRTY MONEY AND THE REAL ESTATE MARKET: Another reason is that Turkey was not placed on the grey list by the OECD Financial Action Task Force for no reason. There is an unusually large amount of dirty money circulating in the market, the source of which we cannot identify. A portion of this is visible in the net errors and omissions in your balance of payments. Another indicator is the increase in consumption despite 80 percent of the population being below the poverty line. Since the demand of those whose income has fallen cannot increase, there is, in some way, an increasing prosperity among money launderers, ranging from drug lords to street-level dealers and neighborhood beauty salons. While on the subject, I suggest that in your fight against inflation, you consider not just the segments whose purchasing power has declined, but also this group and the high increases in corporate profits. In organized crime indices, Turkey ranks first in Europe and 14th in the world... The world's leading money laundering barons are running rampant in Turkey. The real estate market is the sector most used for money laundering. Granting citizenship in exchange for property purchases by foreigners is just the icing on the cake. The details of the real estate market and the net errors and omissions item in the Central Bank's balance of payments have grown beyond what financiers and economists can explain. It has become a police matter. Please take that into account as well.

PRICES AND Sadık Abi: The part of the interview I liked the most was when you compared prices with Sadık Abi, the apartment superintendent. You are clearly saying, “The prices you measure do not reflect the market” you say.  I would like to offer you some brotherly advice here. “If you cannot measure it, you cannot manage it.”

The Central Bank's duty is to ensure price stability and fight inflation. You cannot effectively fight a phenomenon that you cannot measure correctly.  In this country, no one trusts the inflation figures released by TUIK. Your critique of TUIK through the example of Sadık, the apartment superintendent, is excellent. I congratulate you on this. However, you should also compare the ENAG inflation rate with the TUIK inflation rate. When the ENAG inflation rate is at 129 percent, you cannot find the truth with TUIK's 62 percent. Repeat the following phrase often. “If you cannot measure it, you cannot manage it.”

MATHEMATICALLY ABSURD: You expressed surprise as to why people are not switching from foreign currency to the Turkish Lira at these interest rates, and you found this to be mathematically absurd. While I acknowledge the validity of the criticisms regarding the tabloid-style aspects, I will not dwell on them. But this is where you missed the mark in the interview, and in two respects...

In this country, to prevent the dollar from rising, many absurd things were done both before you and after you arrived. First, 128 billion dollars were sold. Then, another 200 billion dollars were sold. It wasn't enough. The Treasury and the Central Bank took on the interest payments that banks were supposed to cover for debt that the public did not incur, known as KKM (FX-Protected Deposits), and the private sector's foreign currency liability was once again placed on the shoulders of the impoverished citizens. Since its inception, we are talking about an estimated burden of 1.6 trillion liras. We do not know the exact figure. We are estimating. If you disclose it, we will learn. For these reasons, there is no harmony between the exchange rate and market prices. Not only the Turkish lira but also the dollar's function as a measure has been damaged. In addition to TÜİK and ENAG, I also measure inflation in Turkey with a different basket, both in Turkish Lira and in dollars. While people in Turkey are experiencing 132 percent inflation in Turkish Lira, the dollar has only increased by 54 percent, and the inflation experienced by those earning in dollars in Turkey is 49 percent...  For those earning in dollars in the US, inflation is 3 percent... With the exchange rate suppressed to this level, you are telling people to sell their foreign currency and convert it to Turkish lira.

But what is worse is this...

You, If you say, "I am surprised why people are not switching from foreign currency to the Turkish Lira; it is mathematically absurd," you would be making a big mistake. In this country, those who believed in the economic management and the statements made by authorities regarding exchange rates and the stock market have always ended up in disappointment. And in a very short time, the opposite of whatever they said always happened. You can set inflation targets, if not exchange rate targets. But all the governors before you said they would bring inflation down to 5 percent.

THE WOLF SURVIVES THE WINTER BUT DOES NOT FORGET THE FROST

Our journalist and economist friend Alaaddin Aktaş explained it with a great proverb in the Ekonomim newspaper. "The wolf survives the winter, but it does not forget the frost." Let me remind you of what we have seen in this country.

In December 2021, they said, "We will continue to lower interest rates," and by driving up the exchange rate and introducing nonsense like the KKM (FX-Protected Deposit Scheme) in the middle of the night, they burned the citizens. Speculators had already received tips on what was going to happen and nothing happened to them, but the citizens were fleeced like fools.  They bought the dollar at 9 liras and pushed it up to 18 liras, then dropped it to 12 liras overnight. 

Chief advisors to the President emerged who said, "If the dollar reaches 3 TL, I will bray in Taksim Square; spit in my face." When the dollar reached 6 liras, they took those who said "The dollar will exceed 10 liras" to court; on the day of the hearing, the dollar was 12 liras. 

And let's not forget the interview the son-in-law gave to Ahmet Hakan. "Do you get paid in dollars?" he asked, thinking he was being clever and mocking people. "I don't look at the dollar" he had said.  I wrote it at the time, and it is still on Facebook. “The son-in-law may not be looking at the dollar, but the economy has reached such a state that he will flee without looking back at the earliest opportunity.” Within 10 days, he said 'the tracks of the horse have mixed with the tracks of the dog,' and resigned via social media without even informing his father-in-law. 

As a Central Bank Governor, your word is very important and valuable. If you call something mathematically absurd and the exchange rate then spirals out of control, you will be embarrassed. Not only will you be embarrassed, but you will also hurt many people. You would end up, even if unintentionally, assisting in a 'sucker-shaking' operation for speculators. Our seasoned politicians will continue to sit in their seats, but they will discard you in a heartbeat.

As you said, interest rates are evaluated according to future inflation, and a 50 percent interest rate is good for a 36 percent inflation target. But in this country, people have been deceived for years with the fairy tale of targeted inflation. You may be able to reduce TÜİK's 62 percent to 36 percent on paper, but what matters is how much you can reduce ENAG's 129 percent or the real inflation experienced by your apartment superintendent, Sadık. Also, have you examined the expenditure items and budget deficits of the 2024 budget?  It does not seem very easy to lower inflation with this budget. And I suspect that many people find the proposed 50 percent interest rate mathematically absurd in the current environment of real inflation. As a citizen devastated by inflation, I hope you succeed  in your efforts.