Don’t be a Turkey

I remember as kid my grandfather saying, “Don’t be a Turkey!”.  I’m pretty sure he wasn’t prophetic about the future but was rather warning me not to be the dumb turkey at Thanksgiving getting baked in the oven.  Oddly, his voice keeps ringing in my head these days as I think about the fight against inflation.  And specifically, the country Turkey whose history against inflation resembles the turkey getting cooked at Thanksgiving.

Turkey’s past and current economic woes stem from a combination of factors. Turkish companies and banks borrowed heavily in foreign currencies, leaving them exposed when the Lira’s (Turkey’s currency) value fell. Additionally, the country has a trade imbalance, importing more than it exports. President Erdogan’s decision to keep interest rates low despite high inflation further exacerbated the situation. This encouraged more borrowing and weakened the Lira. The devaluation of the Lira made it harder to repay foreign debt and increased the cost of imports, ultimately driving up inflation.  In 2022, Turkey announced they were effectively abandoning their fight against inflation and decided to focus on short term economic growth instead.  The consequences were almost immediate as inflation surged, their currency crashed, bond market crashed and surprisingly to some, stock market surged.  However, this surge is likely a temporary blip fueled by speculation, not by a strong Turkish economy.  Don’t worry, their stock market will follow my grandfather’s warning and get cooked in due time as all hyperinflation situations end the same.

This brings me back to the ongoing situation in our country.  With exploding US twin deficits, sticky inflation that’s appearing to rise again, high interest rates causing US debt interest payments to go parabolic, and politicians unwilling to confront the situation, our situation is oddly like Turkey’s.  We still have the world’s reserve currency which is a major difference between us and Turkey which is providing leverage in our fight against inflation.  But can we avoid printing money to cover our increasing debt expense?  

This leaves three possible scenarios in the years ahead:

  1. Government spending continues faster than tax receipts.  Budget deficits continue to expand, and the most likely outcome is central bank debt monetization where we print more dollars to pay increasing interest payments.  This is the Turkish scenario.
  2. Taxes increase and government spending falls causing budget deficits to come under control. 
  3. Government sells assets.  Margaret Thatcher did this in the UK in the 1980s to get debt-to-GDP ratios under control and could be a tactic applied here.  The risk is that as the government sheds assets, the prices of all assets fall.

What would my grandfather’s advice be?  Don’t be a Turkey.

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