To Write the Right Prescription for Inflation...

The Central Bank's decision to skip the interest rates for the fifth time was expected. The number of those claiming "we are entering stagflation", meaning inflation amidst stagnation, is increasing. Although when we talk to sources close to the government, we often receive the response, "Don't worry, we have B Plans". I seriously doubt that the Central Bank of Turkey will abandon its practices under the guise of a tight monetary policy. The Ministry of Finance will continue to raise taxes as well.

A temporary raise in the minimum wage and pensions is not feasible at this time. Even foreign news agencies are working to ensure that the sweet profits made from high interest rates and low currency in Turkey, do not disappear. I consider the categorization of the minimum wage issue by these news agencies as a "test of sincerity in combating inflation" to be both ignorance and unethical. Furthermore, I think it was intentionally biased.

Recently, I said during a live broadcast:

"In the first six months of the program, as Turkey became more expensive than even Europe, domestic consumption began to shift abroad. When even shopping at stores in the UK became more reasonable than in Turkey, citizens started to order what they wanted from overseas via the internet. In response, protection measures were immediately put in place, and some companies had to reconsider their operations.

Now, we are in a process where companies supplying the main sectors are facing chapter 11 or bankruptcy. When sectors fail to procure goods from struggling domestic suppliers, they will turn to foreign markets. This time, protection measures will be applied for this as well. Thus, we will enter another bottleneck."

I am actually trying to draw attention to the most nonsensical part of the program. If we recall the effective demand function, it becomes easier to explain:

Y = C + I + G + (X-M)

Where C is private consumption, I is private investment, G is public spending, and (X-M) is the difference between exports and imports. It is indeed correct that to reduce inflation, effective demand must be lowered. However, due to wrong policies, while consumption is slowing down, it continues on its path with tremendous public spending. Exports are working at full capacity, while imports have slowed down as production has decreased. The economic management presents this as their own achievement. As understood from the equation above, only investments are coming to a halt. Trying to reduce inflation by this method and bringing it down to single digits is not likely. Even a primary school student can understand this.

I would also like to remind the officials who claim, “Don’t worry, it won’t be a hard landing”: No one in world history has managed to write the prescription for a soft landing. These attempts have either resulted in a rapid contraction or resumed inflationary growth.

Solution: It will not be enough to combat inflation solely through interest rate hikes and withdrawing money from the market; applying pressure on foreign currency will bring us more significant troubles. Instead, it is necessary to immediately shift from creating sweet foreign currency gains through carry trade to a free exchange rate. Moreover, manipulating inflation figures is fundamentally an ethical issue. Without applying a radical brake on public spending, failure will be inevitable. We cannot reach any conclusion without acknowledging that many activities, from the foreign trade regime, tax regime, agriculture to trade, from guaranteed payments to contractors, and mega projects, create inflation. Therefore, we must first accept these realities, and then end the wrong practices to implement a rational, conscientious, and long-term prescription that will be embraced by all segments of society.

It was not logical to attempt to reduce inflation, which has come to double digits in seven years, to single digits in three years. A more sensible approach would have been an intelligently charted road map with a time-spread plan. Who knows how many times I have written this; I don’t even remember.

Prof. Alkin