John Connolly hasn’t helped the credibility of any U.S. Treasury Secretary since his comments recorded unprofessional duplicity effectively goading Arab OPEC to launch its ‘oil-shock’ that became official Saudi policy after the Israeli victory of ’73.
The incipient currency crisis unfolding throughout emerging political economies has enormous intellectual patrimony. But don’t expect central bankers around the world to admit they’re ‘behind-the-ball’ in acknowledging indigenous duplicity, especially the political kind that exposes just how ‘lazy’ central banking has become. Let me explain: for centuries central bankers, even those tied to fiat money, implicitly understood the role legislatures/parliaments played in structuring the purchasing power of local currency. This insight, something Walter Bagehot took pains to explain throughout this career at The Economist. But central bankers today no longer operate in a synoptic world. They operate like all specialists do: in a myopic vacuum.
Enter Turkey & India: the Indian currency took a nasty hit in late November. Its balance of payments was in serious arrears, effectively damaging domestic purchasing power. Numerous banks came close to insolvency.
Ditto Turkey. The difference is that Turkey’s currency crisis is home grown.
A devaluation is usually assumed to be the only way central bankers offset both deficit spending and/or liquidity problems. Turkey instead had enforced capital controls preventing a run on its home currency.
It won’t work. Let’s explain.
Privatizations and domestic economic reform has worked since 2004. I must admit, Turkey did what most central banks NEVER do, namely solicit or corral political institutions to reform themselves. This reform agenda to kill inflation worked. Turkey is now in a death spiral. Its a victim of success. Politically allocated credit has morphed into a domestic housing bubble which has popped. This coincided with large capital outflows via U.S. tapering, a serious political crisis involving Erdogan’s AK party pertaining to politicized housing. A monetary, fiscal bubble crisis has now morphed into a political challenge requiring leadership for resolution. Erdogan doesn’t have the requisite leadership.
With strict rules on capital outflows, a massive interest rate hike on domestic reserves along with failing construction (real estate bubble) decimated, Turkey is prostrate for a revolution.
Let’s end with something both Nixon & Connelly understood: a thriving nation can survive the bursting of credit mania. But it cannot withstand political challenges from an inept class that trashes the rule of law, treats political rivals as enemies and criminalizes political differences.
Regime change is coming to Turkey.