Emerging Markets Swoon as Turkey Wobbles

The financial press commentary on the meltdown in the Turkish lira and worries about contagion has for the most part stuck to tried and true tropes. For instance, a hackneyed first page story in the Wall Street Journal claims that early in the new century, all those sorta seedy countries decided they were going to get on the path of becoming good capitalist democracies. But they they backslid.

Since my knowledge of Turkey and emerging markets are limited, hopefully the informational nuggets below are on target, and as usual, reader input is very much appreciated. Interestingly, Jesse speculated yesterday that a short-term bottom might be in and obligingly, the Turkish lira rose 6% this morning, almost fully recouping Monday’s losses. But it is still down roughly 25% for this month.

Turkey was overdue for an economic reversal. The US didn’t cause the financial crisis in Turkey, but it is doing its best to make a bad situation worse.

The best overview by far was at Moon of Alabama late last week. The short version is that Erdogan inherited a Turkey that was an economic mess, and got the benefit of reforms implemented by his predecessor plus additional ones he made. However, Erdogan was inattentive as to the pattern of the resulting growth, which was very heavy on unproductive real estate investment (sound familiar?). He was also unwilling to allow a recession to moderate inflation. But the biggest problem was that Turkey’s chronic current account deficit was getting larger and reached 6%. A rule of thumb is higher than 4% will lead to currency depreciation. Erdogan has made matters worse by not being willing to increase interest rates to choke rising prices.

Trump’s threat to impose steel and aluminum tariffs on Turkey thus added fuel to an existing conflagration.

But the Fed played a role too. The US has long taken the position that it bears no responsibility for how lax or tight money in the US plays a big role in the movement of hot money in and out of emerging economies. From a 2014 post:

As Bernanke is about to take leave of office, attacks on his policies are becoming louder, thanks to financial markets turmoil resulting from the Bernanke/Geithner approach to the crisis: do whatever it takes to restore as much of status quo ante as possible. The problem, of course, is that status quo ante is what got us in this mess in the first place…

India central bank governor Raghuram Rajan took to Bloomberg to criticize the Fed for its failure to coordinate policies with the rest of the world. And Rajan can’t be dismissed as a partisan defending his country’s policies. Rajan is a Serious Economist, former IMF chief economist, and best known in popular circles for presenting a badly-received paper at Greenspan’s last Jackson Hole session that said that financial innovation was making the world riskier and could well cause a full blown financial crisis. And he assumed office only last September, so he’s also not defending policies he implemented. ….

Some of his key points:

Emerging markets were hurt both by the easy money which flowed into their economies and made it easier to forget about the necessary reforms, the necessary fiscal actions that had to be taken, on top of the fact that emerging markets tried to support global growth by huge fiscal and monetary stimulus across the emerging markets. This easy money, which overlaid already strong fiscal stimulus from these countries. The reason emerging markets were unhappy with this easy money is “This is going to make it difficult for us to do the necessary adjustment.” And the industrial countries at this point said, “What do you want us to do, we have weak economies, we’ll do whatever we need to do. Let the money flow.”

Now when they are withdrawing that money, they are saying, “You complained when it went in. Why should you complain when it went out?” And we complain for the same reason when it goes out as when it goes in: it distorts our economies, and the money coming in made it more difficult for us to do the adjustment we need for the sustainable growth and to prepare for the money going out.

Economist Ann Pettifor took up this theme in the Independent yesterday:

Today’s financial turbulence can be traced back to Fed decisions in June 2017 to begin the “normalisation” of its balance sheet, gradually shedding its bond holdings in monthly stages. This monthly “runoff” of $10bn of maturing assets on to capital markets causes bond prices to fall, and yields to rise…

To add to the strains caused by the “runoff” of assets, in June 2018, the Fed raised rates for the seventh time in three years and Libor followed suit. These rising rates of interest have led to the strengthening of the dollar and capital flight from emerging markets…

Thanks to capital mobility, quantitative easing enabled companies, like many based in Turkey, to borrow in dollars on the international capital markets at low rates of interest. Now, as Turkey’s currency and those of other emerging markets fall, the cost of servicing debt denominated in dollars rises dramatically, threatening default.

Last week, the contagion worry was exposure of wobbly Eurobanks like BBVA and UniCredit to Turkey; yesterday, the focus turned to emerging markets. Recall that emerging markets were already looking fraught, thanks to both Argentina and Pakistan seeking IMF rescues. From the Financial Times:

Highlighting the spreading turbulence, Indonesia’s central bank reportedly intervened to support the rupiah, while Argentina’s central bank unexpectedly lifted its main interest rate by another 5 percentage points to 45 per cent. The unexpected hike came after the Argentine peso had fallen for a sixth consecutive day to hit a record low against the dollar.

JPMorgan’s EM foreign exchange index tumbled 1.3 per cent to a record low, and is on track for its worst monthly performance in more than six years. European financial stocks also came under pressure on Monday, especially banks such as BBVA and UniCredit that own stakes in Turkish lenders. US stock were also hit by the turbulence.

Erogan is unlikely to be dented much by this turbulence. Despite being widely disliked overseas for his authoritarianism, such as purging academics, Erdogan still enjoys solid support at home. The country endured far greater instability before Erdogan’s rule, and at a much lower level of general prosperity, so Turks are likely to tough this out. But a “new normal” is being ushered in, and Erdogan is already on track to make it even leaner than it need to be. How popular he will be after several years of belt-tightening, particularly if the currency crisis produces energy shortages, remains to be seen.

It’s not clear what Trump thinks he will gain from punching Turkey. Anyone with an operating brain cell can see that this row is not about a deal to release US pastor Andrew Brunson falling through. Turkey is critical to China’s One Belt, One Road initiative, and has also been working with Russia. From the Chicago Tribune in April:

Russian President Vladimir Putin heads back to Turkey on Tuesday, joining Turkish President Recep Tayyip Erdogan at a symbolic ground-breaking ceremony for a Russian-made nuclear power plant being built on Turkey’s Mediterranean coast at Akkuyu. On Wednesday, Putin, Erdogan and Iranian President Hassan Rouhani are expected to hold a summit in the Turkish capital of Ankara to discuss Syria’s future.

Turkey and Russia have put aside their traditional rivalries and differences on regional issues to forge strong economic ties. In December, they finalized an agreement for Turkey to purchase Russia’s long-range S-400 missile defense system, a deal that raised eyebrows among some of Turkey’s NATO allies. Aside from the power plant, the two countries are also building the “Turkstream” pipeline to transport Russian gas to Turkey.

Moon of Alabama’s take:

The pressure is, and has been since 2013, to bring Erdogan in line with the U.S. agenda. He will have to stop his good relations with Russia. He will have to stop his purchase of the Russian S-400 air defense system. He may be ordered to stop the Russian pipeline. He must follow the U.S. lead on Syria. As long as he does not do so the U.S. will try everything to bring him down.

The only chance Turkey has to escape from U.S. demands is to further ally with Russia. Putin knows that Erdogan needs him. He will play for time to increase the pressure and then make his own demands. Erdogan will have to give up completely on his plans for Syria. All Syrian land Turkey or its proxies hold must be put back under Syrian government control. Only then will the Turkey’s trade route to the Gulf states reopen. Only then will Russia (and Iran) help Turkey though its crises.

Trump isn’t bothering to pretend to treat Erdogan as an ally but as a subordinate. I can’t see that working. Turkey has important assets, in particular, the Incirlik air base. Recall that the US has no major air bases in Iraq or Afghanistan. If the priority is a united front against Iran, pummeling Erdogan into (minimal) cooperation is a presumptuous way to try to get there.

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  1. vlade

    I believe your post is pretty good.

    As you say, there’s a lot of interplay going on. In a way, Turkey has been caught in a perfect storm – there were external elements it could not control, but there also were elements of its own making.

    The interesting bit is how does it try to get out – and there Syria, and whether Erdogan is willing or able to accomodate Russians (I doubt there’s much mileage in him trying to accomodate Trump TBH – especially since Erdogan would never know whether it would last past the next news cycle) there.

  2. Clive

    I’m pencilling together a longer comment with my thoughts on this subject for when a future post arises which that fits in better with, but the current goings-on with Turkey vis-à-vis the US are, in my mind, an extension of the same issue that the UK faced in its future relationship to the US. It is one of the (many) moving parts in Brexit. So I’ll sketch them out here.

    Turkey has long sought to straddle “east and west”. It is a declared candidate country for EU membership (although there is a long list of fairly intractable looking issues to resolve) and is in the EU customs Union. But then as the post above makes clear, it is also quite happy to involve Russia in its economic development, too. Then you have the NATO membership tilting the balance back westward again.

    This policy, reminiscent of that which the fictional president Dr. Kananga of a Caribbean island (“San Monique”) in the James Bond movie “Live and Let Die” espoused as “friendship to all, favouritism towards none” is simply not good enough for the US. The US will tolerate no half-measures. It is a continual source of amazement to me that the UK will put up with endless impositions on “sovereignty” (hundreds of square miles of what is in effect US territory in the form of US Air Force bases, a military which is pretty much entirely dependent on the US even if the products it has to buy are rubbish and “encouragement” (i.e. “orders”) to support cockamamie US foreign policy such as sanctions on Iran (see today’s Links). I won’t even go there about Afghanistan and Iraq.

    This is all absolutely fine as far as most in the UK goes. If the EU sends over even so much as one slightly ill-considered directive on the shape of sausages, it’s viewed as being completely beyond the pale. Such is the typical British person’s view of the US and the EU. This is, however, not in any way especially illogical a worldview to take nor is it even inexcusable national policy in terms of geopolitical alliances. Thus far, if the US throws a strop at a country, as it has with Turkey (or even acts inconsiderately such as was pointed out in the aftereffects of the ZIRP monetary approach by the Federal Reserve), that country suffers. Conversely, if you keep in with the US, such as by being Israel or the Kingdom of Saudi Ariba, you’re not likely to be allowed to get in to too much of a predicament.

    The gamble that the UK was being asked to take as being a strong part of the EU was that the EU would be capable of offsetting the US. If the US got mad with an EU member state, the EU would have its back. While I am perfectly fine with this as a theory, I’m going to need more convincing that this is a practical reality. The current EU trade tantrum will be one to watch to see how well-judged or ill-judged the EU’s confidence is in being able to, at its current level of integration and political or organisational maturity, pull this off. Similarly the EU’s determination to stand up to the US on pulling out of the five-way deal on Iran.

    I’m quite prepared to be wrong on this and end up finding that the EU does stand up to the US and force the US to demur. However, that isn’t what my instinct tells me. Which is that the US can and will rough up the EU just as it is merrily doing with Turkey. Not nice things happen to countries which pee off the US. I have a hunch the US has a few examples to teach the EU to try to persuade it to fall in line. I wish it were otherwise and that the US won’t “win”. But I would not be prepared to risk it myself, hence, reluctantly, thinking the best option (or least worse option) is to, when the US asks if its going to be my way or the highway, to answer, okay, it’s your way, then.

    1. California Bob

      I don’t get it: you insinuate the F-35 is ‘rubbish,’ then cite an article extolling its virtues, to wit:

      “A mere four months later, after witnessing the aircraft’s impressive performance, U.S. and U.K. defense officials announced Lockheed Martin’s concept would go on to become the Joint Strike Fighter. In the years since, the F-35 has continued to evolve. It’s advanced stealth, sensor fusion, exceptional maneuverability, unmatched interoperability, and intelligence, surveillance, target acquisition and reconnaissance capabilities will provide the U.K. with a tactical airpower advantage for decades to come.”

      The jury’s out on the F-35, until it’s vetted–or not–in combat, but your reference is inconsistent in an otherwise cogent comment.

      1. Clive

        Apologies, British humour. I was being facetious citing the over-the-top F35 boosterism. Here is a more academic report https://www.nao.org.uk/press-release/delivering-carrier-strike/

        The Department [Ministry of Defence] has made decisions that could limit how its uses Carrier Strike. The carriers and Lightning II jets rely greatly on technology for military advantage. Technological failures on the carriers might mean that larger crews are needed or place greater pressure on existing personnel. The design and testing of the US-led Lightning II programme is happening concurrently until 2019, increasing the risk that jets already in the UK fleet need modifications.

        So it’s not a production-ready product, in other words. Yet we’re paying the stickered price for it. At the very least, we’re coughing up for Lockheed’s development costs which is a subsidy to a commercial supplier. This is classic Silicon Valley hoodwinking and I’m incredulous this has spread to an engineering company — “move fast and break things” sounds bleeding edge and it might be appropriate for someone like Uber and their dumb-schmuck investors but when it’s taxpayer funded, who pays for the breakages?

        1. PlutoniumKun

          In a way you have to admire the genius who came up with ‘concurrency’ as the way to overcome the long lead times and expense of new weapons systems. It is simply the biggest scam perpetrated on US taxpayers since… well, the last mega scam. It makes big ticket weapons projects almost impossible to cancel, no matter how useless and expensive the final product might be. There is simply no incentive for Lockeed to produce a useable combat aircraft, all incentives are to squeeze as many dollars (and pounds and euro and Ozdollars) as they can out of the project for decades to come. Likewise with the Littoral Combat Ship and who knows what else.

          The only good thing about it is that it makes wars less likely as military commanders get more and more nervous about how their weaponry will perform in real world combat.

        2. animalogic

          Sorry, excuse my ignorance, but why is the UK or any European country in a position that it would consider buying F 35’s ?
          Europe has all the tools & resources to develop it’s own 4th – 5th Gen fighter/bombers yet it buys a (dubious) US one ?
          Perhaps they should just shutdown Airbus – I’m sure the US would approve….

          1. Clive

            I would postulate “look what happens to countries [like Turkey] who fail to pay their tribute to the US and — an even worse faux pas — make the mistake of sending military expenditure bribes, sorry, procurement to (horror of horrors!) Russia”.

            Membership of the US’ cosy little club costs and this is one of the many ways you pay.

          2. Zamfir

            Europe as a whole might be able to develop a modern jet fighter, but it won’t be cheap. Every reason (good or bad) that makes US planes expensive, applies just as well to Europe. Since Europe would spread that cost over less aircraft, it will likely end up even more expensive as buying JSFs. And the US really has an edge here, you can’t just assume that Europe can develop something superior to the JSF. Airbus, for example, has zero experience in fighters, they would have to develop that from scratch.

            Of course, perhaps “Europe” should do this anyway, to strengthen its internal defense capabilities. Then the crucial question becomes: who is that “Europe”, exactly? Who is going to get those capabilities? That question dogs every European defense project, even when the US isn’t putting on the pressure on. Look at the Eurofighter/Rafale split. The A400m, Galileo, it’s all fighting over who gets what.

            And the US does put the pressure on! On the national diplomatic level. On the level of strategic defense firms – BAe gets wide access to the US defense market, in return for the UK not pursuing a European jet fighter. On the smaller levels – many European firms got JSF related orders, which neutralises them as a force oushing for a European project. And in the air forces. Generals get cozy consulting jobs paid by the US. And, I kid you not, European pilots get to sleep next to the toilets on NAto exercises if their countries don’t buy American. Especially in the smaller countries, the air forces look up to the status and might of their US counterparts. They rather play third fiddle to t hhe US then second fiddle to the French.

      2. animalogic

        Sorry, excuse my ignorance, but why is the UK or any European country in a position that it would consider buying F 35’s ?
        Europe has all the tools & resources to develop it’s own 4th – 5th Gen fighter/bombers yet it buys a (dubious) US one ?
        Perhaps they should just shutdown Airbus – I’m sure the US would approve….

  3. PlutoniumKun

    Thanks for this, excellent overview, kudos to NC again for providing the precise no-nonsense analysis of world events that seems to evade so many major media organisations these days.

    I think a key issue for Turkey goes back even further than Erdogan. For several decades, Turkey was desperately trying to ‘Europeanise’ its economy to pave the way for a futile attempt to join the EU. For a while it seemed to be developing a niche as a low cost producer on Europes doorstep (for example, a lot of Italian high fashion garments would be 90% sown in Turkey, then exported to Italy for finishing with a ‘Made in Milan’ label). But its cost base was undermined by even cheaper imports from Asia, and couldn’t compete with low cost Eastern European countries within the EU. In effect, it got caught in a no-mans land economically and lacked a competitive advantage in any key product, and doesn’t have a lot of natural resources. The only advantage the country has is its geography – its extremely strategic location at the fulcrum of the Eurasian landmass.

    The main issueI think is that Erdogan comes from a long tradition of Central Asian strongmen who see the basis of power as engaging in a constant game of shifting alliances internally and externally in order to protect and expand his territory. The problem is, he isn’t very good at it – externally at least. He’s picked the wrong allies and the wrong enemies at the wrong time. And when you have a collapsing bubble economy then you have a perfect storm which will make Turkey very vulnerable.

  4. michael hudson

    Here’s what I’m advising my business school contacts in Turkey.
    Erdogan should do the equivalent of what Roosevelt did in 1933 when he abrogated the gold contract in US debts: Redenominate all Turkish debts owed in euros, dollars or francs in domestic lira.
    This will accomplish two things. First, it will make debts payable. (Never denominate debts in a currency that you don’t earn.)
    Second, it will hurt the euro-banks that have an exposure in Turkey.

    1. Which is worse - bankers or terrorists

      What European banks, specifically, are exposed to a Turkish debt?

    2. fajensen

      Someone once said: “Sure, if you have a beef with a restaurant, you can always blow your brains out at the table and shut them down for a few days!”

    3. vlade

      Not sure this would work. US at that time was pretty self-sufficient, which Turkey isn’t.

      Turkey’s govt debt is low (about 500bln EUR gross), most of it held domestically (60%) – hitting domestic holders by redenom their debt would not be really helpful, and while in theory possible to do it only to foreign holders, it gets tricky (and you might find yourself on the bank sanction lists – and that would cause problems). While the corporate debt grew fast, it’s not too high either – https://www.aa.com.tr/en/economy/turkey-private-sector-foreign-debt-up/1148736

      So the potential savings are limited (even if we assume it’s all non-lira denominated, which it’s likely not), given the impact this would have on lira and the imports, particularly energy imports.

      We have seen that the ‘depreciate your currency to get growth’ is not really working that well anymore, because few countries hold the whole add-value chain, so depreciating currency drops only part of the total costs.

  5. Lorenzo

    as an Argentinean who at 21 is already beyond tired of the periodical debt crises of my country, I’ve wondered what wisdom could emerging economies draw from MMT. The policy recommendations outlined in the Seven Deadly Innocent Frauds kind of shrug off the potential for inflation, and rightly so since ‘inflationary equivalents’ of Mosler’s proposals haven’t produced any worrisome level. Yet as you probably all well know high inflation is a very persistent and toxic phenomenon of the Argentinean ‘crisis cycle’, and of EM’s more generally. So what wisdom could we draw from MMT? Is it restoring the power of the purse through de-dollarization? Is our economy really over-heated? (I refuse to believe this). I appreciate any comments and suggestions from the ‘dear patient readers’ community. I will share what I learn and try to foster debate surrounding MMT within my circles.

    1. Clive

      MMT’s scope is, unfortunately for many like Argentina and now Turkey, confined to where you’re a sovereign currency issuer and (more specifically) are borrowing in your own currency. If either of those two constraints are violated, MMT won’t really help you here.

      Yes, de-dollarisation is the solution. But saying that doesn’t answer why defacto dollarisation happened in the first place. There are sound reasons for this and, regardless, you’re stuck with those non-sovereign demoninated debts so it’s either default (and suffer capital flight) or some variation on IMF-enforced extend and pretend (and suffer austerity via an internal devaluation).

      The other, longer term, option is to make eyes at Uncle Sam up north, sit in the corner, play with your toys and do as you’re told.

      Sorry, I’ve no good options here. See my earlier comment about how we’re all, in my opinion, in the same predicament. I’ve rarely felt so despondent about the chances for human enlightenment on our poor blighted little world. For what it’s worth, and this is purely in the misery-loves-company category, the U.K. is in exactly the same bind, only a slight variation on it. We just manage to kid ourselves we’re in possession of more autonomy than we have.

      1. José

        There is also the Brazilian formula: persistent current account deficits coexisting with a huge influx of dollars via the financial account.

        Let’s look at the figures: from the end of year 2002 to 2018 Brazil had a cumulative current account deficit of US$ 520 billion; in the same period however dollar reserves at the central bank increased from a paltry US$ 38 billion to a massive $380 billion.

        What happened? Dollars entered the country via direct investment, portfolio investment and loans to locally based companies (many though by no means all of them net exporters in dollars). The central bank printed new Reais every year to buy some of those dollars. And now Brazil has a nice cushion of foreign exchange reserves that can be used to defend the Real against speculative attacks.

        I think the lesson here is that for comparatively large economies with a big internal market that attracts foreign investors the key statistics to follow are those of the financial account. Such a country can maintain deficits in the current account while its economy is “awash with dollars” at the same time.

        1. Clive

          A good point. The Brazilian Model, if I may call it that is a valid alternative. Strangely enough, the U.K. operates in a sort-of similar way — attracting inward investment through private sector debt from the Rest of the World but rather than hoarding the dollars or other non-sterling incoming funds like Brazil, it recycled them through outward FDI (currently £1.2trn gross).

          It’s all fine on paper, but the nub of how stable and sustainable it all is depends on the “stickiness” and realisability in a crunch of those dollars or dollar denominated assets.

    2. vlade

      The problem with MMT help there is twofold. As Clive above says, if you have existing liabilities that are not in your sovereign currency, you have a problem that MMT cannot solve.

      MMT also cannot solve if you have a persistent current account deficit (which both Turkey and Argentina have). You can optimize use of your internal resources with MMT, but as long as you rely on sourcing external stuff in quantity that significantly outstrips your exports, you’re not fiscally sovereign anymore – you rely on the kindness of strangers to finance your deficit.

      This is why I keep saying that Brexit-blow-up-Britain won’t be saved by Labour spending left right and centre – because it still needs to import, and the consequet collapse of sterling will induce inflation.

      Think of it in a slightly different way. MMT in effect says that economy is not money, but resource constrained (money is important transfer mechanism, but if it’s failing, and there are still available resources, you just supply the extra money to utilise the resources). But if your economy requires exernal resources, the external parties have interest in your sovereign money only to the extent of what they can purchase with it (which is by definition limitd to your economy). So if you have little surplus, but require external resources, you have to provide something else (now or in future) to the external resource providers. That, in turn, limits what you can provide to your domestic users (remember, we’re using MMT, so domestic resources is already presumably at full utilization – if it’s not, then external funding is not a problem), and you limit the availability of either domestic or imported stuff to your home market. There’s no other solution.

      1. a different chris

        MMT also cannot solve if you have a persistent current account deficit (which both Turkey and Argentina have). You can optimize use of your internal resources with MMT, but as long as you rely on sourcing external stuff in quantity that significantly outstrips your exports, you’re not fiscally sovereign anymore – you rely on the kindness of strangers to finance your deficit.

        But of course this applies to the US as well – except I don’t think it’s the “kindness of” but more the “fear that” strangers have. Nobody knows how a world of a different financial arrangement would work (I think the Chinese actually have some theories, though), thus they keep extending and pretending.

        I share Clive’s overall sadness, including the fact I wouldn’t bet a plugged version of a US nickel on the EU doing anything assertive. Even Trump literally can’t scare them out of their current all-consuming fear of the “different world” I alluded too.

        1. vlade

          Indeed. The ‘problem’ with the US CA deficit is that US could, in theory, remove it if it wanted. Not entirely overnight, but pretty quickly (US being pretty close to autarky). Who knows what it would do to the world as you say, so no-one really has much incentive to upset the cart.

          Turkey and Argentina can’t nearly as easily. What still fascinates me though is the UK’s deficit, which is horrendous (right now close to Argentina’s) and getting worse, although there the problem is disentangling the financial flows that are ‘just’ bank fluff, but count towards that.

          1. Yves Smith Post author

            Gabriel Zucman’s analysis of illicit money flows says including them reduced America/s current account deficit.

            Per an FT Alphaville summary:

            As per Gabriel Zucman’s book, The Hidden Wealth of Nations, the world’s financial liabilities are worth about $7.6 trillion more than the world’s financial assets. Roughly $6.1 trillion of these extra liabilities take the form of equity and long-term debt, with the other $1.5 trillion held in low-yielding deposits and money-market funds.

            As FT Alphaville’s Matt Klein has pointed out already there are only three possible explanations for such a massive discrepancy:

            aliens have been accumulating trillions of dollars of claims against Earthlings
            innocent mistakes by statistical agencies add up to an enormous gap, or, most believably
            the world’s ultra-rich have squirrelled away trillions of dollars from the authorities to avoid paying tax….

            As the IMF noted in a report in 2000:

            In principle, since the exports of one country are the imports of another, the current account balances of all countries in the world should sum to zero. In practice, however, this is not the case. Since the mid-1970s, the sum of all countries’ current account balances has—except in 1997—been negative, giving the world in aggregate a measured current account deficit.

            In 1998, the last year for which complete data are available, this global current account discrepancy was about 1 percent of world imports, but preliminary data suggest that it increased sharply to 3 percent of world imports in 1999. Such a large and variable current account discrepancy is of particular concern at a time when substantial external current account imbalances in the three main currency areas are a major policy issue.

            Zucman argues that the US seemingly large U.S. net debt since the early 2000s is the result of U.S. tax cheats moving fund secretly to foreign tax havens, and then
            reinvesting their money in the US. Look at Paul Manafort as an example. Take that “foreign looking corp is really dodgy US person playing tax games” and he guesstimates the US deficit drops significantly. That also means the US isn’t abusing its status as reserve currency anywhere near as much as generally perceived.

    3. Adam1

      The biggest MMT obstacle is politics and power. Wealthy elite people have a fond tendency to like imports; foreign vacations and very low inflation so that they can live off of risk free government bonds (foreign or domestic). Any strategy that advances reducing import dependence or reducing low margin cash crop export dependencies likely means restricting elite consumption of foreign goods and vacations in order to focus import expense on only important capital needs and necessities to meet the populations living needs. And there will invariable be at least some modest inflation as the economy adjusts. History says this means right wing elite backlash until the old order is reinstated, even if it’s “new” in name only. Just because there is a possible MMT path, if carefully calculated and followed, there may be no simple political path to getting there. Electorally removing the elite rarely means they happily go and stay gone.

      1. vlade

        I haven’t seen any analysis (which doesn’t mean there is none, just that I haven’t seen it), but I believe ‘restricting elite consumption of foreign goods …’ is not sufficient.

        The problem is, as I say elsewhere, that most of the production now involves non-trivial supply chains. Which means you have to import to export. It’s the reason why currency depreciation doesn’t do much for exports these days – it makes it cheaper just for a very small part, while living expenses may go up, so ultimately the saving can be non-existent.

        1. PlutoniumKun

          Exactly, arguing against trade these days is like arguing against the weather. Modern supply chains are so complex and intertwined (even for fairly simple products, like food) that only the very largest countries can even dream of autarky to any meaningful extent. Its not just trade policy, its driven by modern technology and the reality of mass production cost savings.

          The argument should not be about ‘restricting free trade’, it should be about allowing countries to protect key sectors and industries (and most of all, the ownership of the major players), and making sure trade works for everyone, not just corporations.

  6. The Rev Kev

    I think that a missing aspect of this picture is the drain on the Turkish economy by the military and Erdogan’s Ottoman ambitions. Apart from the cost of the Turkish military (about 20 billion annually), which is also the second largest in NATO after the US, there are all sorts of additional cost being accrued. There is the cost of occupying Cyprus where Turkey has about 36,000 troops. There is the cost of not only battling the Kurds but also occupying a part of northern Syria and I have no idea of how much that would be costing the Turks per month. Turkey, last I heard, is also occupying a part of Iraq as well which adds to these costs.
    Then there is the billions spent helping the Jihadist in the Syrian war with stuff like mortar shells, machine gun and heavy weapon ammunition, which were being transported to Syria in Turkish National Intelligence Agency’s trucks which would be a constant drain. Then there is the cost of housing some 2 million Syrian refugees which has cost Turkey at least 8 billion dollars and counting. Then there has been the collateral costs of the Syrian war that it supported like the loss of trade from Syria (at least 1.3 billion annually) and beyond, the loss of Russian tourists and investments when they shot down a Russian fighter. That stunt would have cost them.
    For a while they were getting cheap oil from the Jihadists, part of which they sold on to Israel but the Russians put a stop to that trade. Just through some of the stuff that I found there has been and still is a massive drain on the Turkish economy from Erdogan’s adventurism with little to show for it and with still more losses to come. Turkey is forming a ‘National Army’ in Idlib but they will be toast soon. In Turkey you cannot really find out all these costs as Turkey has a Secret Fund ( Örtülü Ödenek in Turkish) for such military expenses and the like. Under law No. 5018, Article 24, the fund comes under the prime ministry’s budget to be used for the confidential intelligence and defense services so who know how much is being spent.
    The point of all this ramble is that hundreds of billions has been spent supporting Erdogan’s ambitions to seize chunks of other counties and all these cost are coming home to roost with little to show for it. The strain on the Turkish economy would have to have been considerable and I thought that a mention of this should be made to go with that article.

  7. Uuuu123

    The EU should have as much sway over Turkey than the US.

    On the one hand, Erdogan has some cards to play – pipeline negotiations and refugees. On the other, he’s been such a pain, that EU leaders may well chance another attempt to get him out, especially if Trump is there to take all the blame.

  8. Ignacio

    With all due respect -and i meant it truly – i miss here some analysis on how banks are also responsible of all that dollar denominated credit in Turkey. Do those, might I call them bastards, at BBVA etc know anything about currency risk or they just think of their fees and commissions?
    We still think that only the debtor is responsible.

  9. John k

    Couple years ago I spent 2-3 weeks in Istanbul and southwest coast, beautiful scenery with lots of old Roman and Greek ruins, met several Turks, averybody very friendly.
    Tourism was already hurting because airports etc bombings. Istanbul and southwest are westernized, do well with tourism but poorly without it. These areas are fairly secular, hate Erdogan. His strong support comes from the religious interior.
    So the interior will continue support for an extended period, and mostly won’t notice the lack of tourists. But tourism brings much of the foreign exchange that funds imports, so tourism flight is part of capital flight. Nasty when both investors and tourists stay away.

  10. Andrew Watts

    Erdogan was merely the beneficiary of two international credit bubbles and fiscal stimulus post-2008. The reforms he inherited were neoliberal designed to attract the international capital that is now fleeing the country. There isn’t anything that should be surprising about this outcome either. Erdogan and his political allies deliberately held early elections upon the expectation that an economic crisis was coming later in the year.

    Nor does the foreign policy of Turkey in Syria have anything to do with it’s internal economic woes. The only effect it’s had is further poisoning relations with the US. Although witnessing Erdogan’s bodyguards beating up protesters in Washington DC did an effective job of revealing what a petty thug he is. I sincerely doubt that any combination of allies ranging from Russia to Qatar has the ability or is willing to bailout Turkey,

    Too much attention is being lavished on Turkey anyway as it’s merely the first domino to fall in the emerging market sector. That’s assuming I’m right about what I wrote in my previous comment. I deliberately went out of my way to mention emerging markets and their popularity in 2013 as I was anticipating their relevance. Just as I brought up the theoretical role the Turkish lira would play in the next financial crisis at the Portland meetup.

    You’re only as good as the last battle you’ve won.

  11. Unna

    Don’t borrow in a currency you don’t earn.

    I remember a few years back Hungary got into trouble with the Euro and Swiss bankers for trying to curb home mortgages denominated in foreign currencies. The details escape me but if I remember correctly this was one of the things that first kicked off the anti Orban narrative. They want you to borrow in their currency for the reasons we’re now seeing in Turkey. If your foreign debt in US dollars is big enough the Fed gets the hammer over you which they can bring down at any time by causing the US dollar to rise. How much dollar denominated debt does the Turkish gov’t have as opposed to just its private businesses? Countries that value their sovereignty need to de-dollarize.

    About Turkey, it seems that the EU is a big club but the Turks will never be in it. The US is the 800 lbs gorilla but people are starting to figure out that you really don’t want him as a close ally because in the end, it’s only about him and as the Russians will explain to you, the US is just not agreement capable. See, e.g., Justin Trudeau and NAFTA, Iran, Germany’s Nord Stream etc, and now Turkey. The Turks may be reorienting East anyway: buying the S400’s, China Belt & Road, Russian pipelines, de-dollarizing (?), seeking perhaps to join the BRICS (BRICTS). What’s next? Join the SCO as an observer? Instead of buying America’s flying banana boat, why not put in an order for those cool Russian Su35’s? See video starting at 1 min mark. https://www.youtube.com/watch?v=vfYElZi9QTk I mean, if you were in that kind of business, which plane would you want to fly?

    If Obama won the Kaiser Bill Geopolitical Stupidity Prize for threatening both Russia and China at the same time, Trump just won it with Oak Leaf Cluster for not only threatening both Russia and China at the same time, but turning all his allies into adversaries along with it. Now we’ll get to see which countries are dogs and which are felines.

  12. Scott1

    Whatever I’ve heard about Turkey, Erdogan hasn’t made me judge them to be an ally of the US. Buying a Russian Missile Defense system and F-35s means the F-35 loses all of what a 5th Generation Fighter plane advantages were meant to be. Foreign systems mean foreign engineers and mechanics and Russians win from profits from sale along with access to adversarial intel making that sort of set up, wildly stupid for the US to participate in.
    MMT, even if strictly adhered to still requires spending that is wise. If the nation’s currency was being spent on a great society instead of weapons imprisoning people,and the army who knows but that it wouldn’t at least be a desirable tourist destination. Not so much now when one made famous pastor is being held.

    The US Treasury has the elastic power EU nations in the South don’t. The scheme there takes all the advantages of unity away.

    Dictators that become dependent on force for all of their policies drag their nations into hell.

  13. Tuan

    Everything you dread about capital ever fleeing a Monetary Sovereign Nation is …. MISGUIDED. In the words of Ellis Winningham:

    1.) Capital flight is a phenomenon of fixed exchange regimes, not in a free-floating, inconvertible fiat currency regime.

    2.) There is no such thing as devaluation in a free-floating, inconvertible fiat currency regime. That is a phenomenon of fixed exchange regimes.

    3.) The value of the National Currency Dollar in a free-floating, inconvertible fiat currency regime is driven by the Monetary Sovereign Nation government’s taxation authority and is always $1 = $1. There is nothing pegged to it to give it an intrinsic value.

    4.) Investors and speculators do not control the National Currency Dollar (NCD); the Monetary Sovereign Nation government does. Investors and speculators are mere users of the Monetary Sovereign Nation government’s dollar. They can choose not to hold NCDs and instead hold Euros. So what? Investors and speculators do not fund the Monetary Sovereign Nation government; the Monetary Sovereign Nation government funds investors and speculators.

    5.) When a currency depreciates, other currencies appreciate in relation to it. The thing people do not understand is that nations that are net exporters will see a decrease in their exports to the importing which, in turn, will have a negative impact on their domestic economies. The reason for this is because imports in Monetary Sovereign Nation become more expensive, hence, purchases of imports drop which means that the exporting nation faces a decline in its exports to Monetary Sovereign Nation. At any point in time, the central bank of the exporting nation can buy up excess currency, thus defending both the Monetary Sovereign Nation economy and their own. Furthermore, the Monetary Sovereign Nation government has both CAPITAL CONTROLS AND IMPORT CONTROLS at its disposal.

    6.) The NCD can depreciate, but it will not result in out of control inflation. The Monetary Sovereign Nation just went through depreciation. Where was out of control inflation? Nowhere. It can result in a one-time price rise, but a one-time price rise is not inflation. Inflation is a continuous rise in the price level over the period of time the rise is observed.

    7.) There is absolutely nothing stopping the Monetary Sovereign Nation government from deficit spending at any point in time for full employment through a job guarantee scheme which will ensure price stability, and for the public purpose (Health care, Infrastructure, etc.) as long as the real resources are available.

    8.) Even if it were possible for in situ capital to flee, there is nothing financially stopping the Monetary Sovereign Nation government from deficit spending to access the idle resources left behind and the Monetary Sovereign Nation will begin producing its own goods and consuming most of those goods.

    1. Yves Smith Post author

      Straw manning and agnotology (“making shit up”) are violations of our written site Policies. Commenting here is a privilege, not a right, and you are rapidly accumulating troll points.

      You are simply incorrect regarding capital flight. Where were you during the Asian crises, for starters?

      I never used the word “devaluation”. I said “depreciation.” Your putting words in my mouth and then attacking me over your lie is utterly out line.

      Moreover, there are plenty of cases where depreciating a currency does not in fact lead to an improvement in the balance of trade because of factors like inability to produce more of exports, or lack of more interest in buying more of the export good. You miss that one of Turkey’s biggest exports is tourism. Turkey cannot make more beaches or island and cannot quickly create more hotels….particularly if capital is fleeing and its foreign bankers are already worried about loan defaults.

      You apparently missed the comments above that Turkey is not even remotely monetarily sovereign because it has borrowed in foreign currencies.

      Better trolls, please.

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