The inflation dragon has reared its ugly head globally over the past couple of years, rattling economies and consumers from the Americas to Western Europe to Africa, Eurasia, and East Asia. Former US Federal Reserve (Fed) Chairwoman Janet Yellen gave a recent interview where she --somewhat incredulously -- explained that US inflation had taken her by complete surprise. Embattled US President Joe Biden and other politicians have been harangued and taken to task on the inflation problem plaguing the global body politic.
Global inflation should not take anyone by surprise
The supply chain disruptions, COVID-19 lockdowns, and the subsequent coordinated loose monetary and expansionary -- essentially Keynesian -- fiscal policy responses by central banks and governments contributed together to the present global inflation problem. Central banks from the US Fed to the European Central Bank (ECB) to the Japanese Central Bank printed money like there was no tomorrow, in a nod to Modern Monetary Theory (MMT). MMT, in simplified layman’s terms, claims that a central bank can afford to print money without stoking inflation, provided that the currency being printed was the global reserve currency.
Now global inflation is running rampant, fed in large part by the excesses of MMT-inspired monetary expansion. The false gods of the MMT religion have proven themselves to be what they essentially are: false and powerless deities. Now, a real social risk regarding economic inflation lingers in Western Europe and the Americas where the citizenry has no prior exposure to inflation; a prolonged period of inflation could lead to severe social unrest in the West.
The ongoing Russian military invasion of Ukraine has served to exacerbate the global inflation problem by leading to a global shortage of oil, natural gas, wheat, rare earth minerals, and other commodities. The coordinated Western sanctions against Russia appear to have largely failed. The Russian ruble has strengthened to levels above its pre-invasion levels after an initial selloff. Once the initial shock at the severity of the Western sanctions regime abated, it has become increasingly apparent that the Western sanctions have boomeranged back on the West.
The West and the rest of the world are now facing significantly higher energy prices -- further feeding the global inflation fires. More importantly, and dangerously for the post-Bretton Woods global economic architecture, doubts about the viability of the US dollar as the world’s premier reserve currency are increasing. The Russian move toward a gold- and commodity-backed Russian ruble played a strong role in the increased demand for the Russian currency and commensurate skepticism about other fiat currencies.
Energy burden on the Turkish economy
In the Turkish context, inflation has been a recurring theme for the 100-odd years since the formation of the modern republic, ebbing and flowing in a cyclical boom-bust pattern. Abandoning the oil and natural gas fields of Kirkuk and Mosul, the Turkish economy was forced to rely on energy imports from abroad. Consequently, inflation is an inherent structural feature of the Turkish economy, given the need for massive imports of energy (denominated in US dollars) from abroad and a subsequent imbalance in the country’s balance-of-payments account.
The Turkish economy is similar to either the German or the French economies in terms of production capacity and technical know-how. The Turkish population is relatively well educated in the STEM (science, technology, engineering, and mathematics) academic disciplines and Turkish industry is adept at innovating and producing value-added products, using technology as an input. Given relatively higher energy costs, however, the Turkish industry is hampered in how much it can invest in Research & Development (R&D).
The structure of the Turkish economy differs, on the other hand, from the German or French economies when it comes to the cost of energy. For decades, Germany and France enjoyed a huge competitive advantage vis-à-vis other economies through their access to relatively cheap energy, in the form of both nuclear energy and relatively cheap oil and natural gas imports. This allowed German and French businesses to allocate higher levels of investments in R&D. The Turkish economy, on the other hand, faced relatively much higher energy costs, without a nuclear energy industry to lower the energy cost burden.
Consequently, the Turkish economy and industry could only grow with a higher debt burden to finance the relatively higher cost of energy inputs. R&D was prohibitively expensive. Inevitably, this structural feature of the Turkish economy would result in boom periods of credit-fueled economic growth, followed by bust periods characterized by high levels of inflation. The credit cycle relied on policy interest rates as a lever to regulate the speed of the Turkish economy’s growth.
Solutions for Türkiye's inflation problem
The perennial choice Turkish policy-makers face is simple: a sharp rise in policy interest rates or maintaining the flow of easy credit to the economy. The benefit of the former option is that there would be no inflation, but there also would not be any economic growth either -- with commensurately high levels of unemployment. The benefit of the latter option is that while there would be inflation, there would also be economic growth with high levels of employment. A policy-maker would not surprisingly choose the latter option, as the former option would certainly decapitate the economy and result in a severe and prolonged economic recession.
In the meanwhile, a paradigm shift could be achieved by finding a fix to the structural problem hobbling the Turkish economy, namely, higher energy costs. A variety of measures could be explored: expediting the completion of nuclear energy power plants, facilitating the extraction of oil and natural gas from the proven reserves of the offshore Black Sea fields and so on.
The “unorthodox” Russian policy response to the Western economic sanctions, engineered predominantly by Dr. Sergey Glazyev, proves that the traditional interest-rate policy response to combat inflation may be increasingly redundant in a world marked by the rise of multi-polarity, with growing cracks in the post-Bretton Woods global fiat currency architecture.
AA/Dr. Abdullah Karataş