One of the things that the Tres Ricardo keeps telling us is that under Modern Monetary Theory a country just doesn’t have to worry about the FX markets or, indeed, foreigners. Because the central bank can control the amount of money, plus also interest rates. Inflation can and will be dealt with by tax.
The thing being well, no, you can’t control them all:
Erdoğan, a self-described enemy of high interest rates, has repeatedly called for lower borrowing costs. Last weekend, he said Turkey was fighting an economic war against those squeezing it in “the devil’s triangle of interest and exchange rates and inflation”.
At the last meeting of its monetary policy committee on 22 October, the central bank bucked expectations for a big interest rate hike and held its policy rate steady at 10.25%, triggering sharp losses in the lira.
The bank, which also surprised markets a month earlier when it hiked rates, said it would continue with liquidity measures to tighten money supply. It raised the uppermost rate in its corridor, the late liquidity window, to 14.75% from 13.25%.
However, the lira has continued to slide despite those measures, weakening 30% against the US currency this year to become the worst performer in emerging markets.
Bearishness towards the lira stems from concerns about possible Western sanctions against Turkey, depleted reserves, high inflation and political interference in monetary policy.
Inflation is high – near 50% by many measures. The central bank – OK, if you prefer, the government – keeps printing money to finance spending. They’re doing that monetisation of fiscal policy which is MMT. They need to raise interest rates to support the value of he currency. Or, of course, they can accept the devaluation and keep interest rates where they are. And then end up with more imported inflation.
That is, they can’t control all three at the same time. At least one of them has to go the way they don’t want it to in order to control the other two of FX, inflation and interest rates.
Now, Snippa will tell us that Turkey isn’t a place that can do MMT. Only places with certain economic attributes can. And here’s the thing that I’ve a sneaking suspicion about. Which is that the places which currently meet his criteria for being able to do MMT rapidly won’t once they start to do MMT. That is, the places that can, in theory, get away with the monetisation of fiscal policy are those places with a long record of not doing it. And as soon as they start doing it then the ability to do so without hitting this devil’s triangle rather disappears.
Some sort of corollary of Goodhart’s Law perhaps. As soon as the policy is adopted it stops being able to work.