The fact that the Fed has cut rates again will do no good other than making the “emergency state” conditions worse than ever. That’s why I think it’s time to talk about something else.
American doctors who would get a phone call from their patients in the middle of the night used to say, “Take two aspirins and call me in the morning”; because they would either take into account the possibility that the patient might be making a big deal out of nothing, or they actually believe in miracles that an aspiring could bring.
Similarly, governments all around the world believe that low interest cuts would help enliven the investments. That’s why they always tell the same thing to people, “First, we should lower the rates. Then, everything will be sorted out.” However, governments are required to take measures just like a doctor takes every precaution possible to treat their patient, which should be shrinking the public sector as quickly as possible and helping GDP growth with a decent tax policy.
However, instead of doing that, governments prefer a large consumption culture fuelled by low interest rates so they can collect more taxes… The government won’t shrink, economy will grow and everything will be great. That’s what they think it will happen. But, in real economy where cause and effect relationships are more complicated than they may seem things do not work like this.
First of all, we need to acknowledge the fact that interest rate is a consequence not a cause, which means interest is the dependent variable of the formula. Inflation tends to go up when there are more risks around. So, such rate cuts aimed at enlivening the economy would neither bring the desired GDP growth nor would they result in financial instability and moral decay we had to suffer from during 2008 financial crisis. That’s the reason why using interest rates as a weapon always brings the country more harm than good.
If it’s a cost-push inflation, not a demand-pull inflation, increasing interest rates would not help stop price hikes either. What’s worse, it may lead to stagflation. Therefore, a government should always keep close track of interest rates but while avoiding interfering with them too much in a way to disrupt the market reality.
The central banks of coronavirus-hit countries are trying to boost markets’ morale with record-low rate cuts. These countries resort to such so-called remedy so as to either be able to keep running, maintain the momentum of their recently healed economy or just to avoid entering recession.
But, it’s good to slow it down sometimes as recession period may give you the opportunity to repair the damages you have incurred during the rapid economic growth periods of the past. After all, “You can’t tame a running horse”.
If there are people in a country who believe they might become in the future or companies think they might face financial challenges due to collection difficulties, monetary expansion or drastic rate cuts would not help you achieve the desired result. On the contrary, it may cause resources are spent unwisely or used in a way that is not contributive to value creation whatsoever. Turkey has experienced similar challenges over the last 20-30 years. But you know what they say; a leopard cannot change its spots. If Turks don’t trust in markets, they would get loans with low interest rates to invest in foreign currency or gold. That’s what they always do when markets do not offer them any other alternative.
The truth is the world is going through some strange anomalies today. Knowing that there are billions of people are panicking because of coronavirus, it seems unlikely to keep the markets well-functioning by lowering rates. I just hope that the government officials who keep that “Take two aspirins and call me in the morning” attitude will soon realize they will have to take a proper action sooner rather than later.
“It takes more than a few buckets of water to turn the water wheel…”
As I have frequently mentioned in my previous articles, it’s not rational at all to trying to keep a company alive by offering them incentives or low interest rates, especially when this company cannot even make profit of its own operations. As incentive offering is considered an asymmetrical growth model, it is designed to say goodbye to the selected or preferred actor and to say “You should paddle your own canoe now” to the others. That’s why incentive offering doesn’t match the ideals since offering incentives to every sector means offering incentives to everyone.
However, a diversified and simple incentive model which is designed to help enterprises of all sizes would serve as a way effective tool rather than negative real interest rate or “zero” interest rate. Perhaps, adopting this type of approach when offering loans to tradespeople and SMEs would help us achieve the intended result… Small sized enterprises must be supported but resources must be used selectively in accordance with the design of the growth model.
Obviously, we need a new economic model to achieve this goal. All these narratives that have been presented to us, the economists, so far, had nothing special about them. If we, as economists of the country, can’t manage to understand what exactly Turkey stands up for, then no one can. There is this impression that, from military industry to textiles, all approaches of Turkey are being created in parallel with the conjuncture, which means investors do not exactly believe that the government has a long-term work plan. Ever-changing laws and regulations unfortunately worsen the situation.
Of course, we are going through some tough times. But all these problems will eventually be gone and forgotten. Once we are out of the woods, we should have a strong and acceptable model which is designed on the basis of justice, education and freedoms, enhanced with science and art, featuring merit and experience, rising on the pillars of technology, design, branding, innovation and high-quality human resources. A model that can be heralded a change in policy, where we can bequeath future generations good things, other than construction business and military conflict with the enemies.