Economics Professor Emre Alkin: Public spending is undisciplined, investors no longer look at inflation

Stating that real interest rates in the economy must be addressed in conjunction with growth and fiscal discipline, Prof. Dr. Emre Alkin spoke to MAG Business: 'Growth that is not well-managed drags a country into a debt trap.'

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Economics Professor Emre Alkin: Public spending is undisciplined, investors no longer look at inflation

Economist and academic Prof. Dr. Emre Alkin drew attention to errors made worldwide in real interest rate calculations, explaining with striking examples how real interest rates, when not calculated using correct methods, disrupt a country's economic balance.

"Even today, many people who define themselves as experts calculate real interest rates by subtracting current inflation from the current nominal interest rate. This is a highly misleading approach," said Alkin, emphasizing the importance of keeping real interest rates at levels compatible with economic growth and fiscal discipline.

Emre Alkin stated that real interest rates not only protect investors against inflation but also directly affect the debt sustainability of countries.

VICIOUS CYCLE

Noting that the real interest rate must be in balance with the growth rate and the ratio of the primary surplus to national income, Alkin stated that the disruption of this balance could open the door to a dangerous vicious cycle of "rolling over debt with more debt."

WARNING ON LACK OF DISCIPLINE IN PUBLIC SPENDING

Reminding that governments should not forgo primary surpluses during periods of growth, Alkin pointed to the vital importance of public fiscal discipline, saying, "High real interest rates are often the result of good times that were poorly managed. Countries that cannot provide a primary surplus are doomed to a debt spiral when growth remains low."

INVESTORS NO LONGER LOOK AT INFLATION, BUT AT EXCHANGE RATE GAINS

Stating that in dollarized economies in particular, investors calculate real interest rates based on the exchange rate rather than inflation, Alkin said, "As trust in official inflation data decreases, the measure of profit for investors becomes 'how many dollars will I earn at the end of the term'."

Alkin noted that attempting to achieve balance through high interest rates and a suppressed exchange rate harms the economy in the long run, and that economic administrations should not ignore this fragile ground.

Prof. Dr. Alkin concluded his statement as follows: "I am making these assessments as a citizen of a country that has experienced the same mistakes repeatedly, to leave a note for history so that other countries do not repeat them."

News Source: 12punto