There's a long story and a short story here. Short story first.
Turkey is undergoing a slow-moving currency crisis. The value of their currency is depreciating. Sustained depreciations often end in regime changes.
Turkey also has an elected president turned authoritarian dictator. So there's a sense in which this won't end well.
Turkey has also long considered itself to be part of Europe, even more so over the last century. But when it tried to join the EU, far weaker candidate countries (full of mostly white, nominally Christian, mostly Indo-European-language speaking people) were accepted, while Turkey (full of off-white, Moslem, Turkic-language speaking people) got the door slammed in its face. There's more on that in this post on Turkey and the EU from last spring.
Did I mention that Turkey is currently ruled by a strongman? Yeah, he's an Islamist who they voted in after the EU shunned them.
Interestingly, NATO, led by Americans rather than Europeans, has embraced Turkey from close to day one.
In short, we haven't had a country this big in exchange rate trouble in over 20 years. The last time around was Russia under Boris Yeltsin. Since then, Putin has been in charge.
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The long story requires a lot of explanation about international trade and finance.
You can be forgiven if this is new to you. International stuff is always treated at the end of macroeconomics classes, and it often gets done quickly, if at all.
Also, international economics is riddled with misunderstandings and misinformation. Further, the international economic reality has changed a lot over the last 50 years, but many people are still interpreting it through the lens of the 19th century, or worse, the sixteenth.
Lastly, international economics is hard, because you have to look at everything from the perspective of 2 countries instead of just one.
Anyway, here goes. I'm going to restrict myself to two countries, and I'll call them America and Mexico.
We all know the "old school" version of trade in the Middle Ages we were taught in history classes. Fit that story to Mexico. A bunch of Mexicans load up a ship, sail to America, and come home with cool stuff. How'd they get that stuff? Well, mostly through barter, since in the Middle Ages there was no currency exchange (they did use bullion somewhat, but I want to ignore that for a while).
Now it's time to put on your economist's hat on for a minute. If they bartered, the stuff exchanged must have exactly the same value. If it didn't, you're assuming that either the Mexicans or Americans were systematically stupid. That could be true, but it wouldn't be economics.
But you may protest that when this happened in the Middle Ages, the trade goods brought back to Mexico would have been worth a lot. Not to the people on the ship before they got there! They were valuable because the ship got back to Mexico with stuff no one had seen before (the people on the ship did not think they'd gotten for a steal, and they were used to having it around). In fact, no one talks about this much, but I'm pretty sure all the stuff the traders brought with them was worth a ton in the places they landed. That's the thing with trade: both the Americans and the Mexicans thought they got a good deal.
Savor that for a moment. Everything you were taught in history about the importance of trade in the Middle Ages got the most fundamental point wrong. It wasn't the stuff that made people rich, it was the fact that it was traded from people who valued it less to those that value it more.
Now, bring that forward to 2022, and in my story, Mexico has balanced trade: their exports and imports had the same value. So does America.
A different thing that the Mexicans could do, and which was also done in the Middle Ages, was barter for real property in America. So they bring goods, and exchange them for a house. They sail home to Mexico and everyone thinks they're idiots. But if they can load up on goods once more, and sail back to America, now they have a trading post. Or just a home away from home.
Come forward to 2022 again. Now Mexico has a trade surplus (it exports but does not import), and America has a trade deficit. Before, Mexico's surplus from exports was matched by a deficit from imports. It's still matched with a deficit, but now it's a capital account deficit. The capital account captures stuff that's unlikely to be moved across borders, like goods. In reverse, America has a trade deficit, and a capital account surplus.
Just a quick digression here. We usually talk about the capital account and the current account. The latter is goods and services rather than just goods. I'm going to switch from trade deficit/surplus to current account deficit/surplus below here.
This is a good time to point out how quickly the thinking of some people gets goofed up when thinking about trade. Many people in the U.S. (and honestly, everywhere else too) view current account deficits as bad, and capital account surpluses as bad. You know the arguments: 1) we don't make anything here anymore, and 2) foreigners are buying our land. And yet these deficits and surpluses clearly go hand in hand. In fact, because they have to, we get the principle of the balance of payments. It's called the balance of payments because the two sides have to ... wait for it ... balance. Neither one is bad: the whole thing is neutral.
Back to Mexico and America. Now I want to introduce money into the mix. This ramps up the complexity.
For a Mexican trying to sell goods or services in America, there are two basic situations. In the first, you take your goods to America, and let Americans pay for them with their dollars (this is what a hotel in Cabo is doing when you book a room from Utah). The problem here is that you now have dollars that you can only spend in America. This is OK if you're going "old school", and will buy a bunch of American goods to bring back to Mexico and sell for pesos, that you in turn can spend where you live. It's also OK if you want dollars to buy something American that will stay in America, like a factory. That first possibility isn't much different from the first Middle Ages one described above, while the second possibility isn't much different from the second Middle Ages scenario. So far introducing money hasn't goofed things up much. But what if you're a Mexican who wants to sell in America, gets paid in dollars, but really just wants to convert them to pesos? It's here that things get difficult. More on that after the next paragraph.
The second basic situation for a Mexican trying to sell goods or services to Americans happens if some American sends a buyer over to Mexico to buy your stuff and re-sell it in America (this is what Walmart does, and all you notice at the store is a "Hecho in Mexico" tag). But, of course, you're still in Mexico, so you'll make that American pay you in pesos. As a Mexican, you never have an exchange rate problem in this case.
Now, returning to the first situation, the problem is that a Mexican has dollars they need to convert to pesos (assuming they don't want to buy American goods and services or assets). The second situation is both similar and different: the American has dollars and needs to convert them into pesos. Everything would be OK if they could just get together, but that's impractical. It might even be easier for the Mexican with dollars to find another Mexican who wants to go to America with dollars to buy stuff to bring back to Mexico (which is what their superstores, like Soriana, do). By the same token, it might be easier for the American who wants pesos to find some other American that already has them from selling in Mexico (like say, Ford).
Roughly the situation ends up with a bunch of people having bags of money that they want to get rid of, but which have value to someone else.
Now, if you're a Mexican sitting their with a bag of dollars, you want pesos. It should be clear by now that there could be Mexicans or Americans with pesos, so their nationality doesn't really matter. They could be from anywhere. But if they have pesos and want dollars, you want to talk to them. Now, if they want to trade a bigger bag of pesos with you, that would be good. You'd feel that your dollars are more valuable. But we need a new word that covers that but doesn't imply that you want the dollars you're trying to get rid of. But you'd still be happy about the situation, so we call than an appreciation (of dollars, because you're getting more pesos). But we'd also say that the same transaction reveals that the value of pesos has depreciated. So when someone wants to get rid of currency it depreciates, and the other currency appreciates.
It can also be the case that the motivation is to get into a currency. So maybe Mexico is suddenly cool and everyone wants pesos for their trip there. If you're the Mexican sitting there with dollars, you might be happy for your country, but from a business perspective the value of the dollars in your bag has depreciated.
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Which brings us to Turkey, whose currency, (the Turkish) lira, has been depreciating for years. And it's getting worse. What does this mean? It either means people are trying to get out of lira positions (by offering to give up more of them), or that they're trying to get into the moneys of other countries. The thing is, it probably can't be the latter consistently, since there's way too many countries for all of them to be appreciating at the same time. Occam's Razor suggests that the problem is people wanting to get out of lira.
Who would have lira that they'd want to get rid of? Well, don't be distracted by the stories told above. Those are illustrative. Are their foreigners who sold goods and services in Turkey, got paid in lira, and want to convert that? Sure, of course. Are their foreigners who've done business in Turkey, and bought capital there that they'd like to sell? Sure, of course. Are their Turks who want to get rid of their lira to acquire some other money to buy goods to take back to Turkey? Again, sure, of course. But, like I said ... don't get distracted. The biggest holders of lira will always be ... Turks. Lots of them. So if the lira is depreciating, because people are willing to give up big bags of them to get smaller bags of other currencies, the most likely culprit is normal Turks trying to get their money out of the country.
Why would they want to do that? Because they sense they are tied to a sinking ship: their citizenship, their identity, their language ... is a form of (cultural) wealth that isn't very liquid. So they are trading away their more liquid wealth. They've made the call: they no longer want to be Turks with liras, they want to be Turks with dollars or euros, or whatever. And just like the Mexican towards the top of this post, maybe some of them want to buy foreign goods to bring home to Turkey, but now it's a lot more likely that they want to use the dollars they can get to buy capital in America, and so on. This is how people start new lives.
Always, everywhere, politicians who are in trouble will try to divert attention away from this. They'll blame foreigners or speculators. And they're not lying. There's always some of those. But be realistic: those groups will never be large compared to the mass of population. They'll also blame the rich. But, of course, those are the people who have wealth that is more than cultural, and which can be harmed by bad policies. In some sense, they are the proverbial canaries in the coal mine. Note that what all 3 groups share is movable, liquid, wealth. If they need to move it they can. The trick for a politician is to not put them in that situation in the first place.
But, of course, in the kleptocracies that are common around the world, sometimes those rich people and the policymakers, are one in the same. So the policy can be a way to provide cover for the politicians taking their own liquid wealth out of the country.
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Even so, politicians can easily make this worse. Generally this is through relatively expansionary monetary policy. The relative comparison that needs to be made is to how expansionary monetary policy is in other countries. Expansionary monetary policy amounts to putting more liquid assets in peoples' hands. So it should be fairly obvious that expansionary monetary policy would make it a lot easier for dissatisfied citizens to increase the size of the bag of lira they'll trade for any other currency.
Do make sure you get the distinction right. It isn't expansionary monetary policy that causes depreciation, but rather relatively expansionary monetary policy, especially relative to your major trading partners (who you'll also be trading moneys with).
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I have collected way to many articles to link to all of them. And I don't expect anyone to read all of these, but most of you should browse them a bit.
Turkey has been going downhill for about a decade. As a result, there were riots in 2013. These were violently suppressed. In 2018, the government was reorganized to put more power into Erdogan's hands. By reputation he is now surrounded with sycophants who won't disagree with his policies.
Of course, refer to the article linked at the top of this post about Erdogan moving cronies into positions at the central bank about a year ago.
This was followed by a pretty steady depreciation of the lira through the fall, here on 9/23, again on 10/21, a depreciation of 4% in just minutes on 11/16, here on 11/18, failed efforts to prop up the lira with central bank purchases on 12/1, followed by firing the finance minister, more central bank purchases on 12/13, a halt to all stock trading on 12/17 as people try to liquefy their holdings,
This went along with interest rate cuts, and more rate cuts, pretty much one a month all autumn.
And by the way, Turkey is the world's major exporter of hazelnuts, so if your Nutella gets too expensive, you'll know why.
Turkey's inflation rate came in for 2020 at 36% per year. While you can't forecast from a plot, the slope is close to vertical now, so extrapolate with care.
On the last day of the year, Turkey's central bank reported a change in proceeds from open market operations from a $5B loss to a $5B gain ... in one day! It's not clear where this came from. What is clear is that like most central banks it's non-profit, so the profits it does make will be poured into the government treasury.
N.B. I am not unbiased. I have economist friends who have been imprisoned by the Erdogan government.
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