President Donald Trump seems to think that Turkey has been trying to take advantage of us by having an economic crisis that’s sent their currency tumbling... so he’s taken steps to make it tumble even more?
Why yes, yes he has.
Now, if none of that makes sense to you, don’t worry: It shouldn’t. This might be the dumbest crisis ever. Turkey, you see, has hurt itself with bad policies, tried to blame foreigners for this fact, but then, unbelievably, seen Trump seem to vindicate their scapegoating by trying to bring their economy down in retaliation for them bringing it down themselves. It’s a comedy of errors that couldn’t be less funny for the Turkish people.
drop in lira’s value against US dollar since year’s start
It all started with Turkey’s own mistakes — or, more accurately, with Turkish President Recep Tayyip Erdogan’s. He subscribes to the completely backward theory that lower interest rates cause lower inflation, which, now that he’s given himself the power to pick the country’s top central banker and made his son-in-law the finance minister, is actually being put to the test.
Spoiler alert: It’s not going well. The predictable result is that this has made inflation get out of control — it’s up to 15.9 per cent when they’re supposedly trying to keep it to 5 per cent — because the central bank has been so slow to raise rates, and, in fact, refused to do so at its most recent meeting.
Far worse than that, though, is that this has also sent Turkey’s currency on a downward spiral that threatens to destroy their entire economy. Why is that? Well, there are three things to understand. The first is that Turkey needs to borrow a lot of money from overseas; the second is that the Federal Reserve’s rate hikes have made holding money in the United States attractive enough that it’s hard for Turkey to get what it needs without sweetening the pot for investors by raising rates itself; and the third is that, as a result of all its past borrowing, Turkey has foreign currency debts equal to 30 per cent of its economy.
Put these all together, and you get a pretty classic emerging markets crisis: Money has been leaving Turkey because it can now get good enough returns elsewhere, which is then pushing down the value of their currency so much that their dollar debts are getting harder to pay back. Indeed, through Thursday, the Turkish lira had lost 32 per cent of its value against the dollar just since the beginning of the year. If it fell much further, it might push a lot of Turkish banks and businesses that had borrowed in dollars into bankruptcy — assuming they didn’t get bailed out first.
And then it did on Friday.
This was really two stories. The first one was that Erdogan gave a speech doubling down on his failed policies, saying once again that all their problems were the result of an “economic war” being waged against Turkey. This, of course, was nonsense.
While it was true that US sanctions on a few top Turkish officials over an American pastor being detained had put more pressure on the lira this past week, this was far from the main reason their currency has been falling so fast. Turkey has mostly done that to itself — until, that is, Trump started tweeting. He seems to see Turkey’s collapsing currency not as an existential threat to their economy that they’re trying to forestall, but rather as something they actively want to try to make their exports more competitive. And so he announced that he is going to double the steel and aluminium tariffs on them to make up for the fact that “their currency” has slid so “rapidly downward against our very strong Dollar!”
This had the opposite effect of what Trump intended. That’s because a trade war would make it even harder for Turkey to get the dollars it needs, so the lira would be even less valuable. Which is why Trump’s tweet made it fall even further than Erdogan’s reality-starved speech had already made it. At one point, it was down as much as 19 per cent on the day, before rallying a bit to bring it to “only” a 13.7 per cent loss. Since the start of the year, it’s now down a full 41 per cent against the dollar. And it’s not too far away from the level at which Goldman Sachs warned that Turkey’s banks would run out of the extra capital they’d built up as a buffer against a crisis.
It’d almost be funny if it weren’t so tragic. One economically-illiterate leader is crippling his own economy and blaming everyone else for it, which then turned out to be partially correct when another economically-illiterate leader decided to cripple their economy as payback for what they’ve done to themselves.
It’s a Coen brothers-level farce that the people of Turkey and every other emerging market that’s been caught up in what’s now a broader currency sell-off aren’t laughing at.