There has always been a method to the madness of Turkey’s leader Recep Tayyip Erdogan, who cut interest rates even while the value of the Turkish lira vanished on foreign exchange markets. The method, however, showed its fragility on Friday, December 17, when the currency traded at 17 to the dollar, about half its November level and one-eighth of its 2014 exchange rate.
Central banks usually raise interest rates when their currency implodes, but Erdogan’s appointees in Ankara did the opposite, accelerating the lira’s fall.
Their method: Turkey’s housing market has provided an inflation buffer for the middle class, while hard-currency export revenues had kept Turkish industry afloat – so far. But these arrangements appear to be disintegrating. On December 17 Turkish stocks fell by 9% before the government stopped trading in equity and other markets.
Turkish prices have exploded, with inflation running at roughly double the government’s official report of a 21% year-on-year gain. This has devastating impact on Turkey’s working poor, but the country’s major industries and its middle class have kept their heads above water.
Two-thirds of Turkish households own their own homes, as I noted in an August 8, 2020, article, “The Talented Mr. Erdogan“, and the value of residential real estate exceeds $700 billion, more than 20 times the value of the Turkish stock market. Negative real interest rates and a flood of housing loans have kept…