OMG Turkey – 12%?!


Holy crap!

Turkey’s central bank has raised rates to 12%

This should certainly settle the Turkish currency problem, but Holy Mother of God.

The immediate reaction was a spike higher in the futures (by a fair bit too!) but anyone who thinks this sort of outrageous interventionary move isn’t going to bankrupt plenty of people…… well…..

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Let’s add a bit of analysis to the Turkey thing, shall we?

Turkey, as you recall, dramatically raised rates last night.  The market reacted with a monstrous 10 handle spike in the futures overnight, which now has reversed to near-10 handle loss.


Turkey took the action because capital was fleeing their country.  How do you stop it?  Well, you can try to put hard capital controls in, but if you do that people will look for a way around it, and now you’ve declared that investing in your nation is not safe because that investment becomes “involuntary” whenever you decide to make it that way.

That has a bad impact on confidence, you see.

So instead what you do is dramatically raise rates by withdrawing liquidity.  This, you hope, gives people a reason to invest in your country.

That will probably, in the immediate term anyway, stop the capital flight.

But there is a cost associated with that.  What happens to all the people who would want to borrow money to do something, and worse, what happens to those who already have borrowed money and need to roll it over?

Ah, grasshopper, that’s a problem.  See, how do you plan to roll over your debt when suddenly a 400+bps increase shows up in the rate of borrowing?  You can’t.  And if you can’t afford the new, higher rates?  You are instantly screwed.

Worse, to the extent that this causes people to want to invest in your country for new loans it makes you “more competitive” than everyone else around who is practicing the ultra-low-rate game.  This in turn means that you are stoking capital flight elsewhere.

And what will those nations do in response?  Why they might raise rates too!  In fact, they might have to, for the same reason you tried it.

All of this is of no great import if there is no material amount of leverage — that is, outstanding borrowing — in the system.  But if there is, then everyone who has borrowed or lent money gets doubly screwed.  That borrowers get it twice is obvious, but that lenders get it too is not, for most people — but it should be.

See, when the new rate of issuing debt is up 4% the imputed value of all existing paper — such as bonds — goes down in value by a commensurate amount times its remaining duration.  And who holds that paper?  Banks, insurance companies and pension funds, primarily.

I have tried to point out for several years now that the premise of low rates “stimulating” the economy was a false God, because that which you get in lower interest payments the lender loses in the form of lower interest income.  The only reason it appears to work is duration matching, but that’s a short-term phenomena and is an active fraud to promote because the damage is simply spread out — it shows up slower than the “gain” but it also dissipates slower as well in an exactly equal amount.  There is thus no actual gain at all, and the distortion it puts into the marketplace in the form of imputed value on those bonds that is in fact false and extremely dangerous, especially when that shows up in the government sector and people are “allowed” to claim those bonds are money-good without having to mark them to market prices.

What Turkey did isn’t going to stabilize anything; it in fact is going to undercover insolvencies and that will spread.

Bet on it.

Oh, and we deserve what’s coming here because our President, our Congress (remember Kanjorski’s hearing?) and our Fed have all actively participated in this charade over the last five years.


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