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Thread by @TheGoatDaddy: "Welcome to your favourite amateur economics lesson, today we'll examine the reasons to why the Turkish lira depreciated, the way it was hand […]"

23 tweets, 5 min read
Welcome to your favourite amateur economics lesson, today we'll examine the reasons to why the Turkish lira depreciated, the way it was handled and the results (1)
So a quick introduction, on August 18th  the Turkish lira suffered from a Dip of about 33% in value, which caused abit of a 'panic' in the media as the Turkish economy has a history of failed currencies And also the general political tension surrounding turkey (2)
The Turkish economy has been running a currenct account deficit for more than 12 months now. meaning there is more money flowing out turkey than into turkey. This puts downward pressure on the currency asthe supply of the currency is increasing on the international market (3)
Second of all, the US Dollar has been appreciating in general as it recovers from the 2008 and more importantly the new US tarrifs being placed by pres. trump this also places downward pressure on the lira however it's a general trend between alot of developing countries (4)
Third of all, generally speaking economic growth is always coupled with inflation, as the economy grows more ppl have more money which means they spend more which means prices go up.
In Turkey's case the growth rate has been exceeding expectations year after year hitting as high as 7% on a regular basis. Which ofcouse also means hitting really high inflation rates (above 13% sometimes) which again places downwards pressure on the currency.
And finnaly the last point which is, in my opinion the main reason the Turkish currency dropped soo sharply and suddenly. The Turkish gov encouraged Turkish businesses to take loans from outside turkey usually denominated in $ or € as to take advantage of the lower rates.
Those loans would be backed and Guaranteed by the government against default. This was done in an effort to expand the economy further by giving businessss  access  to  more credit.
However this  practice also encourages business to take on uncalculated risk which ends in them defaulting on their payments And when the gov needs to pay those loans it Guaranteed they need to print out more money to cover them.
this money is placed directly on the international market because the debt is dominated in dollars or Euro. This results in a spike in the supple of Turkish Liras dropping it's value, which is what we saw on Aug 18th.
The Turkish gov began by acknowledging the flaws in their model and stating that they will attend to this issue urgently. Now conventionally a modern economists in this case would recommend an increase in interest rate (which is what the international bank recommended).
The thought process behind this is that:
1)The higher IR would attract money into turkey boosting the value of the currency
2)Higher IR means less credit(money) in the economy lowering spending and inflation which would relive the currency from the burden of the high inflation.
On the other hand increasing the IR will reduce investments done by companies as taking out a loan would be more costly, this would reduce economic growth significantly.
The Turkish gov decided to take the unconventional path of using fisical policy (government action) to remedy the situation. The program by which the gov backs loans done by business has been canceled, furthermore Qatar pledged 15billion$ of investment in turkey
Those steps have been recognized by investors such as JP Morgan who didn't lose confidence in the Turkey.This was made clear as the Turkish lira fell the Turkish stocks saw an increased inflow of investments,it was seen as an opportunity to buy Turkish stocks at a cheaper price
Because of those policies The Turkish lira recovered from around  7.3 back down to 6.5 to the dollar in about two weeks
Further more, the Turkish central bank decided to sharply increase rates recently which cause the Lira to further appreciate in value. This move both reasserted the independce of the central bank of turkey as Erdogan wanted to keep rates low and also it curbs inflation
Both of which help the Lira regain value and investors regain trust and confidence today the Turkish lira is at about 6.1 Liras to the dollar.
In conclusion, the Turkish economy is deff not under attack from a foreign power, and also it's not in crisis. Investors saw the dip in value as an opportunity not as weakness which sparks the question,
just how much does the confidence in the economy,a none quantifiable variable, help in keeping an economy afloat compared to more direct and quantifiable measures such as inflation, currency and the current account?
Economics is just so sexy 💕
One of the dumbest things I heard about this is that "turkey wants to keep IR down because they're are seen as Haram in Islam", japan probably the most none Muslim country has fucking zero percent IR😂
Goodnight
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