The lesson of Turkey is a lesson the US should heed

Markets have fallen on fears related to Turkey’s economy. It just goes to show, when governments do obviously stupid things, there is a price. When economic indicators flash red, that means trouble will follow. The crisis that is now beginning to unwind was predicted by many. Equally predictable errors are being made elsewhere.

Article updated: 14 August 2018 9:00am Author: Michael Baxter

The lesson of the 1990s

In 1994, the US Federal Reserve began to increase interest rates after a sustained period when rates had been exceptionally low. This created a chain of events that led to multiple crises. At least some of the seeds of the 2008 crisis were laid during this period.

For some time now, I have been suffering from a nasty bout of deja vu. Indeed, without trying to burden you with my problems, it has been quite acute. I have written about it here enough times.

You see, during that period in the early 1990s, certain countries had grown off the back of cheap money pouring out of the US, looking for a more profitable home. The so-called tiger economies of South East Asia boomed. When US monetary policy went into reverse, that money moved back into the US, creating havoc in emerging markets.

As a consequence, 1997 saw the Asian crisis, 1998 saw the Russian crisis and also that year we saw the collapse of LTCM - Long Term Capital Management. It took the US Federal Reserve, its chair at the time, Alan Greenspan (living up to his nickname as the maestro) and the IMF to avoid contagion reaching the west.

There were consequences. In an effort to ensure it would not fall foul of the market ruthlessness, as happened to its neighbours, China formulated its currency policy that the US so hates. Russian distrust of the West was rekindled, and the bailout of LTCM created a moral hazard problem that may have exacerbated banking excess that led to the 2008 crisis.


In recent years, certain countries have been building up debt. There has been a consensus that most emerging markets and indeed developed countries are less vulnerable than they were in 1998. Turkey and oddly enough, Canada, as well as the usual candidates such as Argentina are obvious exceptions.

China has issues too, although that’s a complex story, but so does the US.

Many have warned, over and over again, that Turkey is a problem in the making

Turkey’s President, Recap Erdoğan has been making noises of late that have rattled the markets. He has been taking control of interest rates from Turkey’s central bank and bizarrely said that low interest rates don’t create inflation, as countries with low rates have low inflation - there might be a cause and effect problem here.


The US slapping tariffs on Turkey is not helping.

The implications for international security are worrisome. Turkey is a key member of NATO and the US is pushing it away.


But none of this is surprising.

The crisis in Turkey was entirely predictable and has been predicted many times.

Basic economic conditions matter.

When governments do things that don’t look sensible, things have a habit of catching up.

In the US, the President has frequently criticised the central bank for tightening monetary policy. At a time when the US is close to full employment, the US government is cutting taxes without proportionally cutting spending. It is waging a trade war.

My sense of deja vu says that fiscal stimulus at a time of high employment, leads to inflation and higher interest rates. It tells me that higher interest rates at a time of high levels of private and public debt leads to crisis, and trade wars tend to be associated with economic downturns.

You were warned about Turkey, consider this a wider warning.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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