How to fight back against inflation…

Within a couple of hours after you read this report, inflation data will be released. And I’ll be live on television to share my opinions with you before the announcement.

The unexpected early spring feeding Turkish Monetary and Capital Markets was really confusing for everyone. Last Wednesday at Altınbaş University’s Gayrettepe Campus, Professor Mahfi Eğilmez and I tried to explain the reason for the arrival of an early spring.

With his humbled and principled attitude, Professor Eğilmez is a hardworking and fairly productive academic, capable of explaining even the most complicated matters in the simplest way possible. I, on the other hand, am a scientist who enjoys getting to the philosophical bottom of economic developments. Even Professor Eğilmez said, “You’re following in your deceased father’s footsteps”. What he said really means the world to me.

We both agree on the fact that the inflation-interest rates-exchange rates movements are consequences only while the real problem are in fact the motives that yielded these consequences. Trying to change the outcomes is a never-ending struggle as it is quite difficult to improve human behaviour that brings these consequences in the first place. Maybe that’s the reason why people find it far easier to discuss the reasons rather remedying the consequential damages.

Although it may seem more reasonable to try to find the root causes of economic inflation instead of constantly fighting back against the inflation itself, the humanity somehow dislikes rational approaches. In the United States, for instance, the cost of child poverty is $500 billion a year. On the other hand, the cost of actions to eliminate the poverty is only $336 billion, which means some people do not want poverty to go away. And the same goes for many other powers.

“Why sudden interest in TRY…”

Exchange rates bring a significant impact on inflation. Lucky for us, exchange rates seem to be loosened up these days, which, brings inflation under control despite increasing oil prices.

But why is USD/TRY falling, why the level of buying at stock market is quite high recently? The first reason is that people who oversold or made a lot short selling under the influence of those propagandizing that “Turkey is finished!” in November-December 2018 have now changed their positions, which means those how have sold previously are now buying, and those who have previously short sold are now closing positions.

The second reason is among the factors that triggered the occurrence of the first reason: Investors no longer want to engage in yuan-denominated investments due to Chinese economic slowdown. Therefore, Turkey is about to become their new favourite with its high profit potential.

And the third reason has rather a supplementary nature: Fed’ transition from Hawk to Dove stance clearly indicates that they won’t rush rates hikes in 2019. Thus, we can feel more positive vibes about developing country and emerging market currencies. That fact that the Fed kept interest rates unchanged at their latest meeting and chose to deliver a rather cautious statement is helping these positive vibes get stronger.

But, surely we need to learn from the 2002-2013 process during which exchanges rates remained almost absolutely stable, hardly increasing or falling. We should remember that, back then, construction industry alone had dominated and sustained Turkish economy due to downward trend of interest rates while people giving up producing and focusing more on importing because of low exchange rates. Turkish lira was pretty valuable and we had single digit interest rate even though we didn’t have Oil or Natural Gas. The situation back then however created a sedative effect on Turkish Economy.
Once people realized that 2019 will be a tough year, “production and exports” once again became priority items of Turkey agenda. You know what they say; every cloud has a silver lining… Maybe this difficult situation has a comforting aspect, like giving us the strength to increase Turkish prosperity.

In conclusion, I think we should take this opportunity, while exchange rates remain moderately calm these days, and focus on more urgent matters. I believe that measures to reduce manufacturing costs will improve progress and prosperity as well.