Is this the spark that sets the world alight?

Thursday, 23rd August 2018

Is this the spark that sets the world alight?

For most folk, what happens in Turkey might as well be happening on Mars….

I must confess that I don’t tend to think about Turkey very often myself….

And even when I do, my thoughts are more Bernard Matthews than banks of the Bosporus….

What happens in Turkey – the world’s 17th largest economy as measured by GDP – doesn’t seem to have much impact or relevance on my day-to-day life….

What happens in Turkey seems to me to have little effect or consequence out in the wider world….

But that might be about to change….

What is unfolding out in Turkey right now might well create waves that are felt worldwide….

  • Cheap credit rules….

The Turkish lira has fallen significantly in value and has been doing so for some time….

The national currency has lost more than 40% of its value over the last 12-months. It’s a full-blown crisis. Make no mistake….

There are lots of complex reasons behind this dramatic plummet in value. Most of them I don’t fully comprehend. Others I cannot begin to explain….

But there are a couple of things I do understand….

One, Turkey has been engaged in a 10-year orgy of money printing – increasing the money supply by 458% over that time and diminishing the value of every existing lira with every new one printed….

Two, President Erdogan has an unhealthy attitude to monetary policy….

The man doesn’t like interest rates. Not in Turkey. Nor anywhere else. He refuses to raise them….

The man believes wholeheartedly in the power of cheap credit – and plenty of it. Erdogan is a man of and for our times….

  • Filling the buckets….

We all know what happens when credit is cheap and plentiful….

Governments, institutions, businesses and consumers all rush to the standpipe to fill up their buckets and barrels with debt….

They’ve been at it worldwide for almost 10-years now….

Borrowing money was cheap. You could borrow almost as much of the stuff as you wanted….

And when it came time to pay back what you had borrowed, it didn’t matter if you didn’t have the money to hand. You could just borrow some more….

After all, it cost almost nothing to borrow it. So, what’s the problem?

And everything was and is just dandy whilst servicing that debt – or maybe refinancing it – remains cheap….

But if conditions change, things can get much tougher….

And that’s a fact of life that Turkey is being reminded of right now….

  • Running into difficulty….

For many years the Turkish government has been borrowing heavily….

It has been taking-up cheap credit and using it to finance what the government refers to as ‘Mega Projects’….

We’re talking about things like the Istanbul New Airport; the Kanal Istanbul and the 3-story Grand Istanbul Tunnel and a whole bunch of other showpiece infrastructure projects….

A big proportion of the money Turkey borrowed to finance these projects was denominated in US dollars – almost $200 billion worth (50% of Turkey’s gross external debt).

Now that the Turkish lira has fallen so dramatically against the dollar, the dollar-denominated loan repayments are much more difficult to make….

Every lira is worth less and less in dollar terms with every day that dawns….

Every day that dawns, the outstanding US-dollar denominated debt becomes harder – if not impossible – to pay back….

  • The greenback rules….

The dollar rules. It is the major currency of the world….

And that gives the US government huge geopolitical advantages….

When the US government can’t pay its own debts, for example, the solution is elegant and simple….

The Federal Reserve just cranks the handle on the printing press and runs off as many new dollars as are needed….

So long as the Federal Reserve has access to enough quantities of paper and ink, US purchasing power – be it of goods, services or influence – can be ramped-up at any time. So too can lending power….

That’s a nice situation to be in. You can get real stuff in exchange for value you create out of thin air….

No wonder the US has been the world’s number one superpower for so long. With that deal, I think I could become the world’s number one superpower….

  • But Turkey cannot turn to the printing press….

But the Turkish government, along with the rest of us, must live in the real world….

Much as it might like to, the Turkish government can’t print dollars….

The Turkish government is stuck with the Turkish lira – in good times and bad, in sickness and in health, for better or for worse….

And it gets worse still when investors see the lira plummeting and realize that the Turkish government might very well default on its foreign debt obligations….

In anticipation of that, investor capital takes flight….

Investors move their money out of the lira and out of Turkey – weakening the lira further and making an already difficult situation for the government more difficult still….

  • So, what? Who cares?

Of course, you and I cannot solve Turkey’s debt repayment problems….

And if that’s the case, unless we’re thinking about heading out to Turkey for a cut-price break and some bargains, it’s hardly worth our knowing about the lira and its decline in value….

Greece had problems. Cyprus had problems. Venezuela and Argentina have got big problems. These basket-case countries must find ways to deal with these things on their own….

That’s how most people think. And I get it….

But the problems these countries and their economies are experiencing could soon become our problems….

Or at least become problems that have a more direct effect on us….

I guess that’s the gist of this week’s column….

  • The contagion effect….

You see, Turkey isn’t the only country out there with a currency declining in value and large amounts of outstanding dollar-denominated debt that is becoming increasingly difficult to pay back as a result….

Chile, Argentina, Mexico and Indonesia are all in the same boat as Turkey….

And, like Turkey, they are all considered high-risk candidates for upcoming default on US dollar-denominated debt….

And they are just the countries that are most at risk….

Behind them, there is a whole host of other countries that might be sucked into a similar situation in the event of a domestic currency crisis….

The fear is that rather than being a stand-alone basket case, Turkey might well set off a contagion – which is what they call it when turbulence, turmoil and chaos in one market spreads like an airborne virus into other markets….

Some commentators out there reckon that what’s happening in Turkey right now is the spark that will set the next global financial crisis aflame….

I don’t know if that’s going to happen. I haven’t got the first clue. I’m a publisher not an economist or a currency analyst or a clairvoyant….

But the fact that it might happen makes Turkey a lot more interesting and a lot more important in the greater scheme of things than is usually the case….

The Turkish crisis is a story worth following. It could lead to all sorts of fun and games. At the very least, It promises to be entertaining….

That’s how it looks from here….

All the best,

Dave Gibson

Money Truths