“You’re independent but you have to aim for the same target”.
That is what Berat Albayrak said during a panel discussion in Davos on Wednesday, while discussing central bank autonomy.
Albayrak is Turkey’s Treasury and Finance Minister. He’s also Recep Tayyip Erdogan’s son-in-law.
Regular readers know how this evolved. In July of 2018, after consolidating power in a position he (basically) made up, Erdogan shocked markets by appointing Albayrak as economic czar. “This is absolutely not what we hoped for”, one strategist said at the time, summarizing widespread incredulity. “Markets were awaiting the cabinet appointments and the signal is clear: It is not market-friendly, but rather Erdogan-friendly”.
The move effectively confirmed everyone’s worst fears with regard to Erdogan’s determination to enshrine his unorthodox economic “theories” into the fabric of monetary policymaking. He had spent the previous six months steadily encroaching on CBT’s independence, much to the chagrin of the lira, which, after a monthslong slide, went into free fall in August 2018 when US sanctions tied to the Andrew Brunson saga pushed Turkey to the edge of a full-on crisis.
Albayrak’s comments in Davos this week underscore the extent to which Donald Trump’s brazen, public attacks on Jerome Powell and the Fed have served to legitimize autocrats in their quest to make monetary policy explicitly beholden to the executive.
He left little doubt about the connection. Here’s Bloomberg:
Should anyone question if the central bank is acting under pressure, Turkey’s top economy official said at the World Economic Forum in Davos, that he has a ready answer. It’s “as independent as the Fed,” Albayrak said with a smile.
Not to put too fine a point on it, but I suggested from the very first day Powell took the reins that it was just a matter of time before Trump morphed into Erdogan. I spelled out that prediction explicitly in a humorous post for Dealbreaker dated February 18, 2018. To wit, from that piece:
…circling back to poor (and by “poor” I mean in terms of circumstance, certainly not in terms of his massive back account) Jerome Powell, he’s going to quickly find himself in a situation where he’s getting pressure not to raise rates no matter what happens to inflation and no matter how hot the economy is running.
I don’t think everyone fully appreciates how soon-to-be precarious this is going to get for ol’ Jay. Just imagine for a second that Trump’s myopic tax cuts and stimulus end up getting him the economic sugar high he’s after and just as he’s shrieking about it at a rally, the Fed hikes rates citing an overheating economy. Trump would go crazy. He would never let that stand. He’s going to turn into Erdogan when it comes to rates.
Do me a favor and read the following quotes from a speech Erdogan made back in November when inflation was spiraling out of control in Turkey and the lira was plunging:
They say central banks are independent so we shouldn’t interfere. This is the end result because we haven’t interfered. Results speak for themselves.
We will solve this, things can’t go on like this.
Who does that sound like to you? I mean, besides Erdogan.
If you read the accompanying color from Bloomberg it’s even easier to imagine Trump going this route if Powell gets too aggressive. To wit:
Erdogan [is] vowing to step up a fight against what he calls the “interest rate lobby,” an alleged cabal of financiers and lobbyists that he says is conspiring to keep Turkey’s interest rates artificially high.
It’s almost too perfect a parallel. Before you know it, “the swamp” and the “American deep state” will include Fed governors.
Needless to say, every bit of that prediction has come true – and then some.
Now, Erdogan’s son-in-law is openly joking about it in panel discussions at Davos.
And it is funny. But then again, it’s not. Because this is yet another manifestation of Trump’s behavior normalizing autocratic regimes. Trump has made it ok for tyrants to bully central bankers in the same way his attacks on the media embolden autocrats to curtail press freedom and jail journalists.
Importantly, this is not what MMT advocates have in mind when they speak of public-private partnerships where central banks help underwrite fiscal largesse with the goal of maximizing employment and economic well-being up to the point when inflation takes off.
It’s true that many MMT’ers would agree (in spirit anyway) with Albayrak’s “aiming for the same target” characterization of monetary policy, at least where that means the central bank shouldn’t work at cross purposes with fiscal policy if the goal is to achieve a better standard of living for a given country’s populace. But bear in mind that Erdogan would be pushing for rate cuts irrespective of inflation. And never mind the fact that he most assuredly does not print a reserve currency. Indeed, the central tenet of Erdogan-o-mics is that higher rates cause inflation. (It’s absurd, but so is Erdogan.)
Although we can’t know this for sure, it’s certainly plausible to suggest that, like Erdogan, Trump would push for rate cuts even if inflation weren’t below target in the US. The US president consistently cites low inflation as a rationale for his attacks on the Fed, but that’s only out of convenience.
Ultimately, the message is simple: There’s certainly room for a discussion around whether and to what extent monetary and fiscal policy should coordinate with the shared goal of engineering better economic outcomes. But that coordination needs to come about in a healthy way, not by decree. And certainly not by any decree issued by madmen.
Appendix: How things evolved in Turkey following Albayrak’s July, 2018, installation as economic czar
Things subsequently stabilized once tensions between Washington and Ankara eased, but it wasn’t long before Turkish assets came under renewed pressure.
Last year, in April and May, local stocks and the lira were beset by a laundry list of concerns, including a slumping economy, depleted foreign reserves, the erosion of democracy, the absence of central bank independence and the S-400 question.
As usual, Erdogan emerged largely unscathed, although the Istanbul election result was a real dent in the fender for the incorrigible strongman.
Undeterred by market forces in his quest to commandeer monetary policy, Erdogan ousted CBT chief Murat Cetinkaya in July, a little less than a year after Albayrak was put in charge of the economy.
New governor Murat Uysal knew what he had to do. Uysal delivered the largest rate cut in history shortly after being installed. He subsequently lowered the benchmark another four times including January’s 75bps cut. The total amount of easing under Uysal is 1,275bp.
The lira is down over the period, but hardly enough to change Erdogan’s mind. He continues to insist that rates will eventually be lowered into the single digits. With this month’s cut, he’s nearly there.
Turkey has now succeeded in driving real rates into negative territory, as we said they probably would a month ago.