The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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A Turkey For Thanksgiving . . . ?

Longtime economic truism — money goes where it is most appreciated!  In other words, why would I buy a certificate of deposit from a bank with a lower interest rate, when I could get a higher rate at a different bank.  Funds would flow out of the bank with the lower rate and into the bank with the higher rate.  Money goes where it is most appreciated or compensated.  It is similar for nations.

Take the case of Turkey, where their currency (Lira) has depreciated 40% so far this year and is still falling.  That means their imports, like oil and food, cost about 40% more – a huge increase in consumer cost-of-living.  Most nations would therefore increase interest rates, attracting more funds to that nation, which increases demand for their currency and therefore increases the price of that currency, reversing some of the currency depreciation and lowering the cost of imports and consumer cost- of-living.

Again, take the case of Turkey.  Instead of increasing their interest rates, they rapidly decreased them, making Turkey less attractive to foreign funds, which flowed out of Turkey, thereby decreasing demand for Lira and driving down the price of Lira even more.  In other words, they made it worse.

Their leader, President Erdogan, is a dictator with a Supply-side bent.  He believes lower interest rates will encourage businesses to borrow money and improve the economy.  He doesn’t seem to understand that a rapidly falling currency reduces business confidence and increases the non-Lira debt of businesses.

If you have family in Turkey, send them one-way plane tickets.  They will face tough times if you don’t.

Be thankful —  you don’t want this Turkey on your table for Thanksgiving!