Dec. 29, 2021

E5: Bombing the Turkish Economy - Part 1

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Season 2

This is Part 1 of a 2-part episode on the Turkish economy and its ongoing currency/debt crisis. In this part, we will discuss the merits of theory and how they do or do not apply when exposed to reality. We will explore the advice of classical economic theory given to President Erdoğan and the reasons for why he does not follow it, religious aspects notwithstanding.

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Chapters

00:00 - Intro

02:45 - LeMay's Application of Theory

28:35 - Turkey's Economic Crisis

41:11 - Shortcomings of Classical Economic Theory

01:03:14 - Turkey's Economic Realities

01:22:11 - The Foreign Investment Drug

01:38:03 - The Perfect Storm

Transcript
WEBVTT

00:00:00.530 --> 00:00:14.679
Today, we are going to kick off part one of what is going to be a two-part episode where we'll talk about the current economic crisis that's going on in Turkey and the controversy surrounding president Erdoğan's comments about his interest rate policies.

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In today's part we're gonna set the stage by delving into how competing economic theories attempt to explain the situation that's going on in Turkey.

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And then in part two, we'll explore what happens when these economic theories clash with the reality of the situation on the ground.

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To start off, though, let's listen to a succinct summary provided by Deutche Welle and their reporting on the current crisis.

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Let's have a listen.

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Double-digit inflation and a crashing currency are turning the income and savings of millions of Turks to dust.

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The Lira has lost 50% of its value against the dollar since the beginning of the year, more than almost any other currency.

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Discontent is growing in recent weeks.

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Demonstrators took to the streets in Istanbul and Ankara, they called for the government to resign.

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Many lay the blame for Turkey's currency crisis on president Recep Tayyip Erdoğan.

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Every time he pressures the country's central bank and calls for interest rate cuts, the Lira plummets even further.

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Economists warn, inflation is spiraling out of control.

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And Turkish consumers are the ones who literally have to pay the price, but president Erdoğan hold the unconventional view that lower interest rates fight inflation.

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And despite the Lira crashing, shows no sign of changing his position.

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What we are doing might be politically very risky, but it's the right plan for our country and our nation.

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Come on.

00:02:05.030 --> 00:02:19.819
Don't Bullshit Me! Yeah, the economy slowed down, but you know, it's like telling someone, oh, you need to lose weight, but rather than then going on exercise and dieting, they chop off their legs.

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It's like, okay.

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Yeah, you reduced weight, but now there are bigger problems there.

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Welcome to"Come On, Don't Bullshit Me!", where we peel away the messaging of talking heads to get to the crux of today's issues.

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So one of the things that they teach us at the academy during military strategic studies is the flow from the academic Ivory Tower, if you will, of theory, the doctrine, to the strategy, all the way down to tactics, and more specifically, how each of them evolves along that chain of events.

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And there're countless examples of this throughout military history.

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All the way from Sun Tzu to modern day.

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But one of the big stories that stands out, particularly at the Air Force Academy is obviously of an Air Force general.

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And that was general Curtis Lemay, the father of the modern bomber force.

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And most people today know him as the father of the Berlin airlift, but there is a lot more to him than that in the Air Force.

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He's considered the father of SAC, the father of Strategic Air Command, which was essentially the bomber mafia.

00:03:42.620 --> 00:03:47.780
There there's an expression in the Air Force: fighter pilots make movies, but bombers make history.

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And while World War II was going on, the theory of warfare, which was being constantly tested because, you know, we're in the middle of a world, war was about how bombers should go and run their campaigns, right?

00:04:02.229 --> 00:04:19.009
So this is where the concept of strategic bombing came in, especially after the battle of Britain because the Germans, the Luftwaffe, pretty much destroyed all of the docks and the war making capability of the Brits after France capitulated.

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And according to some reports, there was a candid interviews of Churchill after the fact.

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But basically they were saying, okay, Britain was pretty much ready to capitulate and surrender to Germany right then and there, because the Luftwaffe was so effective in just completely decimating British war making capability.

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But then during that time, the British did a cursory bombing mission to Germany, and Hitler was obviously pissed off about, how dare the British come and reach out, and touch us, and bomb Germany.

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So he switched his focus.

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He ordered the Luftwaffe to, instead of bombing all the factories and the docks-- the British war capability, he said, we're gonna bomb London, the city, and bomb the civilians for their insulins of how dare they bomb the, the Fatherland, or whatever.

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Which actually allowed the British war making capability to recover.

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Because the Germans temporarily stopped bombing their factories, they were able to recover their war making capability and continue to fight.

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And obviously they didn't surrender.

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And then eventually, obviously the United States came in and tipped the tide.

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And while this was going on, they're like, okay, well now that the Germans decimated London, well now it's payback time.

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So the Brits were like, okay, we gotta go bomb Germans, but we need to figure out how we're gonna do this.

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Because obviously it's a, it's a difficult thing to do.

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And they tried to do...

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To bomb specific factories ball bearing plants, because that's the rules of warfare.

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What the hell are ball bearings, right?

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But those are the key components, and bombing the ball bearing pants basically grounded the German war fighting machine to a halt, because ball bearings were essential components in motors and engines and whatnot.

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So, but the Brits realized that their bombs were ineffective, right?

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Because this was obviously before the days of the GPS.

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So they were pretty much reliant on flying over a target, dropping the ball and then letting Isaac Newton's law of gravity do the work.

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And it wasn't really that effective, especially because they were trying to be high up because of the flat cannons and whatnot were a big threat to the bombers.

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Flat cannons are the A AA anti-aircraft guns.

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So to avoid or to minimize the damage from anti-aircraft guns, you would try to fly above the flat cannons so that you can get to the German factories.

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But of course being that high up t hen it's obviously it's harder to hit your targets.

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So that really didn't work.

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So eventually they decided, okay, well we're gonna do nighttime bombing runs, because at night it would be, figured, it would be harder to hit the bombers and, we're gonna be like lows to the ground, and basically instead of targeting factories, we're gonna put like a box if you will, over a city or a town and just bomb the shit out of it.

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Right?

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That's why most German cities are pretty modern architecture, because all in the nice ancient architecture with the wooden façade, the old like, you know, from like Hofbräuhaus comics, you know, those, those don't really exist.

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Except for actually there's interesting...

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Another side story.

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There was this one town right on the Swiss border.

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I forget the name of the German town.

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But obviously Germany, they're like once they realized this nighttime bombing was going on, they pretty much said, okay, everyone has to shut their lights off, right.

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But this one German town that was like right on the Swiss border, they actually, left their lights on.

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And then the Allies thought, oh, well this town has their lights on, so clearly they're not Germany.

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And like it's right on Swiss border so, oh this must still be part of Switzerland.

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So they skipped that.

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And I forget the name of the town, but if you go there now today, you can actually see how Germany looked like, at least German towns look like pre-World war II, because they were saved, because they successfully outsmarted the Allies by saying, oh yeah, we're totally Switzerland.

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But anyway, so the Brits were basically, okay, we're gonna make a square instead of bombing individual factories and, based on the lighting of the towns, dump all your bombers into that square of the village and bomb the shit out of it.

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Like who cares if it's a factory or a civilian target.

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This is obviously the dates before Geneva conventions.

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So the Brits basically leveled entire towns.

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So the Brits would bomb at night.

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Fast forward to 1942: America has entered the war.

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And now there's this big thing where while the Europeans were fighting, the US was obviously neutral and we were doing our own thing.

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Like testing and R&D.

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So we developed this thing, called the Norden bombsight.

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It was this really super accurate bombsight where you can dial in your altitude and the wind speed.

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And then on the bombing ranges in the United States, even though you're like really high up, ridiculously high up based on what would be considered the flat cannon ceiling.

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And even despite flying above that ceiling with the Norden bombsight, you were like super accurate with the delivery of the bombs.

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So the Brits were like, Hey US, we're glad that you're part of the war effort, but we've been bombing the Germans, we've got like two years under our belt.

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We've got a lot of experience.

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So this is what we're doing, we're bombing at night.

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And we recommend you do the same thing.

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And the US being the cocky Americans that we are, we said, nah, screw it, we've got this thing called Norden bombsight.

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The Brits were like, what is it?

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Oh, that's classified.

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That's how, like, even though we shared things like Enigma code, stuff like that, amongst each other and breaking cryptograms and whatnot, the Norden bombsight was so top secret, that we didn't even share it with the Brits, the technology with the Brits.

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But we were like, yeah, we have this Norden bombsight, it's super accurate and we're not gonna do nighttime bombing.

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We're gonna do daytime high altitude precision bombing.

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And we can do that because we have this bombsight.

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And there's this big argument back and forth between British Air power theorists and the American Air power theories on what's a more effective bombing strategy: low altitude nighttime or high altitude daytime precision bombing.

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Long story short, Norden bombsight was shit, it didn't work.

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And we didn't really do that much damage.

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Because, turns out American, quote,"experience", was bombing ranges out in Arizona or whatever, desert conditions, no one's attacking you, nothing.

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So,, we quickly realized that...

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Well we actually, we didn't quickly realize, we didn't realize shit.

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Well, actually we realized it, but we didn't accept it, basically saying, no-no, high altitude daytime precision bombing-- that's the way to do things, and we're gonna do it.

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And then, you know, post mortum, we figured out that, oh, we actually weren't as effective as we thought we were, because the testing conditions on a bombing range are completely different than actual war over one of the most powerful modern empires of human civilization.

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Anyway, the other funny thing was that during this whole debate of whether nighttime or daytime was more effective, rather than one side convincing the other of when and how to actually bomb, because both parties couldn't come to an agreement, each side, each party, decided to do their own thing.

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So we basically took turns: like the Americans would bomb during the day and then the Brits would bomb at night.

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And then the daytime would come and the Americans would keep going on and on.

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So the Germans never actually got a chance to breathe, because because of our own infighting, we were like basically constantly bombing them around the clock.

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Kind of like that.

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Anyway, other than this being an interesting story, we took these lessons...

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Well, actually, they weren't really lessons, because as far as we, the Americans, were concerned, daytime precision bombing was totally the best thing and this Norden bombsight was the greatest thing since sliced bread.

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So we're gonna continue doing this and we're gonna upgrade our B-17s, the flying fortress, which was the main bombing aircraft.

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And you remember the movie,"Memphis Belle"?

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The plane that they were fighting in the"Memphis Belle"-- that's the B-17.

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But anyway, so the new aircraft that they were building was B-29, which was the super fortress.

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And that one was this upgraded airplane, like the Enola Gay-- the bomber that dropped atomic bomb, that was a B-29 as well.

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But it was this super fancy aircraft where everything was computerized, computerized fire control system.

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So rather than having 10 people like in the"Memphis Belle"-- a crew of 10-- essentially one person could control multiple guns on the bomber, on the aircraft.

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And the armor was up-armored to a point, where it said, okay, neither the anti-aircraft, nor the German fighters would be able to fire on it.

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So it was gonna be even more effective than that.

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And obviously it was going to be bigger and larger, and more capable.

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So you can even put more bombs on it, and what have you.

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So, all around, this was a pinnacle of American aviation technology-- the B-29.

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But by the time we got to be able to field it, well, the Germans already essentially surrendered, or at least there were close to surrendering.

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So there was not really no need for the B-29.

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So all that effort was for not.

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But obviously the Pacific war was still going on.

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So essentially all those assets were moved over to the Pacific and were used against the Japanese.

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And this is where Curtis LeMay, this really came about his genius, because basically everyone, at least on the American side, were saying: yeah, it's high altitude precision bombing, we've already verified it.

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Even though it was completely, you know, not true, but as far as they were concerned at the time, yeah, high altitude daylight precision bombing was the way to go, and that's what we're gonna continue doing.

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Until Curtis leMay came in and he was like, uh, wait, wait a second, I don't think we should do this.

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There's something to what the British were doing.

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And what he did was rather than just listening to the theory, and this is what's important, he looked at what the actual situation was on the ground, because...

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And this is why, and this is the whole point of the military MSS-- the Military Strategic Studies class at the Academy: it's not just knowing the theory.

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You have to understand why the theory came about.

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And in business schools they say, like, all theories or all models are, are lies, but some of them are useful.

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So he basically looked at this and said, okay, why are we doing a high altitude precision bombing in Germany?

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Well, because: one, we wanted to get above the ceiling of the flat cannons; and then two, we obviously, we got our Norden bombsight and so we can do a precision bombing there.

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But more importantly, the German war fighting capabilities were pinpointed in these factories, right?

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So that was the point to do high-altitude bombing.

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But in Japan...

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Obviously we didn't do really strategic bombing in Japan for a long time, because our bombers physically couldn't reach the Japanese Homeland.

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That's where in the middle of China, we had the bomber base, in Chengdu.

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But obviously, because back then Japan controlled pretty much the entire coastline of China, even any forces that we pre-positioned out in China were still really far away because the Asian content is ridiculously huge.

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But this is where we had the island hopping campaign where rather than fighting the Japanese, we just basically bypassed them until we got to a point where we conquered a couple of islands that were within bombing range of Japan.

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And that's when, when we could unleash on bombers and do massive damage.

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It's kinda like if you remember in"The Last of Mohicans" where the British and the French were fighting, and then the English were like, oh, we're gonna lose doesn't matter.

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And Daniel Day-Lewis was like, what are you talking about?

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And he's like, well, it's only a matter at a time: as soon as they get their artillery within the range of our Fort, it's pretty much game over.

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So they try to sue for peace and they left and a whole bunch of other stuff happened, and awesome theme song, but whatever.

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May I inquired after the situation, Sir, given that I have seen the French engineers from the bridge above?

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The situation is his guns are bigger than mine.

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That he is more of them.

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They keep our heads down while his troops take 30 yard of trench a day when those trenches are 200 yards from the Fort and within range, you'll bring in these 15 inch waters, lob, explosive rounds over our walls and pound dust to dust.

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Aye.

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So once we got our bombers in range, Curtis LeMay, who was in charge of the 8th Air Force and responsible for this bombing of the mainland, he looked at it and said: okay, well, first off with the jet stream, and basically Japan on virtue being an island, Japan was almost always cloudy.

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It wasn't clear skies like in Germany.

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So going a high altitude necessitated going above the cloud line, which means obviously you can't really see what you're bombing at.

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So, that's one big issue.

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But he also noticed that the Japanese war making machine, if you will, wasn't concentrated in factories like with Germans, but actually they farmed it out, because it was a total mobilization of the population.

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Basically the entire population, including the cities and towns, were also used for war fighting.

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So bombing specific targets for precision bombing strike wasn't as effective in Japan as it would've been in Germany, because the Japanese weren't in specific factors or whatnot, they would be at home or in their little town areas, doing whatever it was that needed to be done for the war effort.

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So the entire cities were contributing to the war effort.

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So precision bombing really didn't make sense.

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And the other thing was, unlike in Germany where most of the buildings were stone or metal work, it was all wood and paper, right.

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So it was highly susceptible to fire.

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So Curtis LeMay said, okay, you know what?

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Even though daylight precision bombing worked in Germany-- and that's what the theory says, even though we technically didn't work, but again, that's, besides the point at that time everyone thought it did work-- he said, okay, even though it worked, I'm not gonna go do that, because it doesn't make sense.

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Because Japan is not Germany, and the conditions in Japan do not apply to the conditions in Germany.

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So we've got to change the theory.

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The theory was right for Germany, but when you apply it to Japan-- for a different area-- it doesn't work.

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So what he said was, okay, we're gonna do nighttime low altitude fire bombing.

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And that's where you had the whole fire bombing of Tokyo and a whole bunch of other cities.

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And of course it ultimately culminated with the atomic bomb, but that's a separate story, which is obviously immaterial to Curtis LeMay's decisions.

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Actually, before this, his whole big genius, if you will, was still, while he was a commander of the 8th Air Force back in Germany, because his whole thing...

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The fighters normally would accompany the bombers.

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Also basically when the bombers would roll in through to where they were gonna go bomb, because it was high altitude, the German radar see them, right?

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Because of the curvature of the earth, it's much easier to see something up higher altitude than it is to see something close to the horizon.

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So there was plenty of warning.

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And because we were going high altitude, we'd have our fighter escorts.

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And when the Luftwaffe would come and try to shoot down the bombers, the fighters would fight, and you have all those zillion different World War II.

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Films like that scene, that famous scene from Millennium Falcon in"Star Wars", you know, the original"New Hope" where they're fighting the TIE fighters.

00:20:45.880 --> 00:20:52.000
And like Luke finally shoots down one of the TIE fighters, he is like, a h, I got one! And H an S olo i s like, u h, don't get cocky kid, right?

00:20:52.000 --> 00:20:52.839
You know,'cause there's more.

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Got it.

00:20:56.319 --> 00:20:56.880
I got him,

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Great kid.

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Don't get cocky.

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There's still two more of them out there.

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That all was inspiration from all those old World War II movies, because that's kind of like how it was basically: you had these guys just like Han and Luke in their little separate shooting laser pods.

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You had like 10 guys on a B-17, on the bomber.

00:21:20.859 --> 00:21:26.950
Most of them, they would've been in their different little gun pods, shooting at the fighters that were flying around.

00:21:27.680 --> 00:21:29.740
And Germans would try to shoot down the bombers.

00:21:29.799 --> 00:21:34.180
And then the fighters would try to protect the bombers and yadi yadi yada.

00:21:35.119 --> 00:21:42.339
And obviously if all the fighters were destroyed, or if they ran out of fuel or whatever, they had to leave, obviously.

00:21:41.980 --> 00:21:46.380
Then the bombers would be exposed and the German fighters could pick off and destroy the bombers.

00:21:46.589 --> 00:21:46.940
Right?

00:21:46.941 --> 00:21:47.890
That was the whole thing.

00:21:48.309 --> 00:21:54.849
But then LeMay, what he did, what he decided was, okay, we're not gonna have the fighters escort our bombers.

00:21:55.480 --> 00:22:01.210
What we're going to do, I'm gonna send all my fighters ahead of the bombers.

00:22:01.240 --> 00:22:03.450
Like, you know, an hour, a half hour ahead of them.

00:22:04.109 --> 00:22:09.359
And then the Luftwaffe, they're gonna be alerted, because they see all that on a radar, all these, allied aircraft.

00:22:09.759 --> 00:22:11.240
So they're gonna send all their fighters up.

00:22:11.740 --> 00:22:24.079
And even if our fighters aren't effective, because they're like half hour to an hour ahead of the bombers,'cause bombers are in air, right, they're just behind, they're just behind the fighters; the they're gonna do their fighting and everything like that.

00:22:24.080 --> 00:22:26.440
Hopefully our fighters will basically destroy the fighters.

00:22:26.441 --> 00:22:30.630
But even if they don't, the German fighters will run out of fuel and they're gonna have to be forced to land.

00:22:30.930 --> 00:22:35.990
So by the time the bombers actually come on station, there's not gonna be any German fighters there.

00:22:36.049 --> 00:22:40.349
We either killed and shot them all down, or they had to RTB-- Return to Base.

00:22:41.049 --> 00:22:42.150
So, and that was the thing.

00:22:42.170 --> 00:22:44.990
And then, okay, I shouldn't be like completely praising him on this.

00:22:44.990 --> 00:22:55.099
Because part of this was because with the invention of the P-51 and Mustang, which was the brand new aircraft that allowed him to do this tactic.

00:22:55.240 --> 00:23:04.180
But still the fact that he even came up with this tactic and said, basically, I'm gonna leave all my bombers exposed, which was back then was unthinkable, because bombers are your most important asset.

00:23:04.440 --> 00:23:11.930
He said, no, I'm gonna leave them completely exposed, but I'm gonna send this fighter screening ahead of them to basically bait the Luftwaffe.

00:23:13.009 --> 00:23:14.369
It was kind of ingenious at the time.

00:23:15.010 --> 00:23:15.769
Now it makes sense.

00:23:15.829 --> 00:23:17.849
But back then, obviously it was a super genius thing.

00:23:18.750 --> 00:23:21.009
So he already proved his genius in Germany.

00:23:21.509 --> 00:23:30.009
So when he came to Japan, he was already primed with credibility of successfully challenging assumptions, underpinning doctrine or theory, or whatever.

00:23:30.079 --> 00:23:40.079
So I spent all this time talking about how this amazing new aircraft B-29, that was super up-armored and got all these fancy control systems and could carry all these bombs and whatnot.

00:23:40.390 --> 00:23:45.839
Curtis LeMay was like, well, I see all that fancy armor that we have: we're stripping all that out.

00:23:45.840 --> 00:23:49.640
Which all the fighter, all the airmen were like, uh, are you serious?

00:23:49.641 --> 00:23:50.839
You're gonna get rid of all of our armor?

00:23:51.660 --> 00:23:59.000
But Curtis LeMay, his philosophy was like, okay, we need to end this war, the Japanese aren't gonna submit willingly.

00:23:59.019 --> 00:24:02.240
So we need to do as much damage as we can to shorten the war.

00:24:02.250 --> 00:24:02.599
Right?

00:24:02.601 --> 00:24:11.109
That was basically the theory of almost every single general during that time, because Japanese famously wouldn't surrender.

00:24:11.250 --> 00:24:21.309
So the only way we can really get them to capitulate is just do maximum carnage, because in a weird mess up way, that's actually gonna save the most lives, if we do the most damage.

00:24:21.730 --> 00:24:30.299
So he said, okay, obviously we can only carry a certain amount of bombs on the B-29 because of the takeoff weight.

00:24:30.400 --> 00:24:35.980
But if we remove all the armor, or the unnecessary armor, we can put more bombs on.

00:24:37.319 --> 00:24:39.859
And obviously the airmen were like, you can't take all our armor.

00:24:39.580 --> 00:24:41.900
And he was like, no you're gonna do that, because we need more bombs.

00:24:42.200 --> 00:24:44.940
But to counteract, we're gonna fly at night.

00:24:45.720 --> 00:24:50.849
Because the Japanese were famously known to be not good at fighting at night.

00:24:50.960 --> 00:24:56.369
Like their anti-aircraft and their fighters, their airmen-- they just weren't effective at night.

00:24:56.470 --> 00:24:57.769
So we're gonna go at night.

00:24:58.309 --> 00:25:04.690
And we're not going to have advantage of the bombsight, but in order to counteract that, we're gonna fly at a low altitude.

00:25:05.589 --> 00:25:14.759
And that was another reason why you'd want to do low altitude: it was in order to get up to the cruise ceiling of, I think it was like 30,000 feet that takes a lot of gas, right?

00:25:14.900 --> 00:25:20.680
To get all the way up to station of like 30,000 feet high, drop the bombs, and then obviously you come back.

00:25:21.121 --> 00:25:25.039
But getting up to that high altitude takes up a ridiculous amount of fuel.

00:25:25.619 --> 00:25:29.509
So if you just go low altitude, well, then you don't need that much fuel.

00:25:29.599 --> 00:25:38.390
Which means two things: you can put more bombs on your aircraft, or you can have the same amount of aircraft, but you can fly it from further back.

00:25:38.730 --> 00:25:43.269
And when you're talking about the Pacific theater being islands, you don't have that many places to fly from.

00:25:43.369 --> 00:25:45.869
So the range extension is a huge thing.

00:25:46.369 --> 00:26:02.420
And he did this, even though all the theories and everything that was beaten into his head, from the academics to application and even the public or institutional pressure of the army Air Force were saying, yeah, high altitude daylight precision bombing is the way to go.

00:26:03.400 --> 00:26:04.900
He said, no, conditions are different.

00:26:04.930 --> 00:26:07.099
This is the way it is in the Pacific theater.

00:26:07.569 --> 00:26:08.849
This is what we're going to do.

00:26:09.190 --> 00:26:32.519
And rather than having all these conventional bombs that were effective against modern earthworks-- the metal and the brick of Germany-- they'd load up with fire bombs and napalm, and phosphorus, or a whole bunch of things that were basically incendiary bombs that would just basically not do so much physical damage, but most of the damage would come from the fire damage.

00:26:32.980 --> 00:26:43.759
And of course, knowing that the Japanese buildings were basically wood-based, wood and paper based, you knew that that would be more effective than just conventional anti metal bombs.

00:26:44.380 --> 00:26:45.920
And sure enough, it worked.

00:26:46.509 --> 00:26:47.640
To devastating effects.

00:26:48.109 --> 00:26:57.400
Obviously a lot of people today talk about the atrocities of the US committed against the Japanese, when looking at the fire bombing that happened there.

00:26:57.401 --> 00:26:58.920
And also fire bombing Dresden.

00:26:59.589 --> 00:27:07.750
Some would even argue that the atomic bombs that we dropped were less destructive than the fire bombing that was done on Tokyo and Dresden.

00:27:08.450 --> 00:27:14.869
But the fact that we even have this debate just shows you how effective the fire bombing campaign was.

00:27:15.339 --> 00:27:23.900
That all came about because LeMay went against the conventional theory, because conventional theory was based on different set of circumstances.

00:27:24.079 --> 00:27:32.099
And he realized that, okay, in this new battlefield, we have to redo our assumptions, based on the conditions of the battlefield.

00:27:33.240 --> 00:27:59.009
And I won't say"long story short", so long story long, this is a big part of the MSS studies at the academy: talking about not only how Air theory, Air Power theory came about, but also how we have to recognize not just the theory, but understand the assumptions behind every theory, so that we can make our own assumptions and update the theories based on the conditions of the battlefield.

00:27:59.349 --> 00:28:00.809
Because every battlefield is different.

00:28:01.240 --> 00:28:07.279
There's that whole famous saying that generals are always training to fight the last war.

00:28:07.490 --> 00:28:12.880
'Cause the whatever war we're fighting is gonna be presumably different than the last war.

00:28:13.359 --> 00:28:18.279
But because the only thing that we know is the last war, everyone trains for the last war, even though that's not necessarily effective.

00:28:19.019 --> 00:28:21.200
So that's Curtis LeMay.

00:28:21.880 --> 00:28:23.240
What does it have to do with today?

00:28:23.599 --> 00:28:25.309
I am finally getting into it.

00:28:35.930 --> 00:28:49.380
So the main point of this is to address the comments about what's going on in Turkey with the lira depreciation and the inflation, and economic troubles that Turkey is going through right now.

00:28:50.069 --> 00:29:03.539
Where it's pretty much almost universally stated that Erdogan, the president of Turkey, is being an idiot and he is constantly lowering the interest rates and that's what's causing all these problems.

00:29:03.599 --> 00:29:10.650
And if we just do what the conventional economics theory states, which is raise interest rates to stop inflation, then everything will be back to normal.

00:29:11.240 --> 00:29:21.490
Because according to conventional economics, if you have inflation, your economy is running too hot, so you have too much money chasing too few goods-- that's the famous phrase.

00:29:22.029 --> 00:29:26.839
So what you wanna do is: the Central bank of Turkey, it needs to raise interest rates.

00:29:27.299 --> 00:29:31.079
And if it raises interest rates, well then what are people going to do?

00:29:31.640 --> 00:29:36.200
Well with interest rates raised that means, the cost of borrowing is going to be expensive.

00:29:36.201 --> 00:29:45.279
Which means people that would normally spend money would not spend money, because buying things is gonna be more expensive, because the interest rate on loans is going to be expensive.

00:29:44.840 --> 00:29:49.000
And Because it's more expensive to borrow, they're gonna borrow less, right?

00:29:49.059 --> 00:29:51.519
And borrowing presumably would be to spend it into the economy.

00:29:51.980 --> 00:29:54.880
So because they're gonna be borrowing less, they're gonna be spending less.

00:29:54.930 --> 00:29:55.279
Right?

00:29:55.579 --> 00:30:06.230
And also the other side of the coin for raising interest rates means are gonna be paying you more money for saving in your savings account, which encourages savings.

00:30:06.329 --> 00:30:15.069
So not only are you not spending money in the economy, because it's too expensive to spend the money, but you're also going to save that money, because the banks are going to pay you more money.

00:30:15.289 --> 00:30:26.180
Or I should say, because the banks are going to pay you more money, it is more advantageous for you to keep that money in the bank and not in the economy, which further cools down the economy.

00:30:26.559 --> 00:30:34.019
And that means since there's less money chasing the same amount of goods, well then inflation will drop and then you're saved, right?

00:30:34.039 --> 00:30:39.579
That's pretty much what anyone in high school or first year College economics class would tell you.

00:30:39.930 --> 00:30:40.859
This is like standard.

00:30:41.119 --> 00:30:44.730
I'm not saying anything shocking or controversial here.

00:30:45.069 --> 00:30:57.849
And that's actually why everyone is basically calling Erdogan an idiot, because any high school or a College economics undergrad student is going to tell you, if you have a high inflation, raise your interest rates, everything is good.

00:30:58.789 --> 00:30:59.569
So that's the thing.

00:30:59.570 --> 00:31:13.720
And of course Erdogan is like, no, I'm gonna lower the interest rates'cause interest rates are bad, and I know better, and if you lower the interest rates, that's going to bring Turkey back to prominence.

00:31:14.519 --> 00:31:17.480
And there's a lot of theories out there, why he's thinking that.

00:31:17.980 --> 00:31:27.109
All the way from the crazy things from, okay, he's just going in his old age, he's becoming senile, or that okay, well this guy, he's not a secularist politician.

00:31:27.930 --> 00:31:36.309
The whole thing about Turkey, or should I say the Republic of Turkey, you know, post 1923, is that it came out of the ashes of the Ottoman Empire.

00:31:36.930 --> 00:31:55.220
And the founder of Turkey-- Mustafa Kemal Atatürk-- said, okay, we're going to be a secular nation, because that's the only way to bring Turkey from the backwards history of the Ottoman Empire days and remove religion as an influence in politics or within the state.

00:31:55.839 --> 00:31:58.940
And he was educated in Switzerland and also in France.

00:31:59.000 --> 00:32:01.099
So like code Napoleon La laïcité.

00:32:01.779 --> 00:32:09.089
You know, la laïcité is different in America: in America we have freedom of religion, whereas in France or La laïcité is freedom from religion.

00:32:09.750 --> 00:32:15.529
So that was his whole big thing: it's not just religion or freedom of religion is not enough.

00:32:15.549 --> 00:32:17.130
We have to have freedom from religion.

00:32:17.269 --> 00:32:20.609
So completely divorce religion from the state.

00:32:21.029 --> 00:32:33.880
Anyway, we can devote a whole podcast on the ascent of Erdogan, but essentially as far as Westerners are concerned, they considered him a moderate Islamist.

00:32:34.849 --> 00:32:39.559
Which, and I can get into future reasons why, that's an oxymoron in itself.

00:32:40.380 --> 00:32:47.160
But the point is, Erdogan, the current president of Turkey, is an Islamist, right?

00:32:47.161 --> 00:32:48.799
He's big into religion.

00:32:49.269 --> 00:32:52.359
He's like what George Bush was to Christianity.

00:32:53.640 --> 00:33:03.509
So Erdogan, being a moderate Islamist, or just plain old Islamist, a lot of his theory of governance comes from his theories on religion.

00:33:04.109 --> 00:33:07.069
Specifically, his theories on Islamic religion.

00:33:07.650 --> 00:33:15.029
And one of the things that's said in the Quran is the outlawing of interest rate, of usury, right?

00:33:15.769 --> 00:33:18.470
Usury is forbidden or its haram.

00:33:19.210 --> 00:33:21.099
It's a taboo in Islam.

00:33:21.720 --> 00:33:25.539
So Quran forbids charging interest.

00:33:25.559 --> 00:33:26.900
It forbids usury.

00:33:27.619 --> 00:33:41.450
It famously says, Allah permits trade, but he does not permit interest, and charging interest is the way of the Satan, and whoever charges interest will burn forever in the fires of hell.

00:33:42.470 --> 00:33:50.930
And thing is what you're supposed to do is, you're not supposed to take interest from people, because that's consuming people's wealth unjustly.

00:33:51.390 --> 00:33:54.210
But instead you're supposed to do is you're supposed to provide zakat.

00:33:54.589 --> 00:33:56.049
You're supposed to be charitable, right?

00:33:56.050 --> 00:33:58.490
Because zakat is one of the five pillars of Islam.

00:33:58.829 --> 00:34:07.680
And its actually really further codified, if you will, after the death of the prophet Muhammad, during the reign of Abu Bakr.

00:34:08.400 --> 00:34:13.239
Actually a lot of people say, oh, who's the most winningest general in all human history?

00:34:13.240 --> 00:34:18.679
And people like talk about, oh well Napoleon, he was amazing, or Genghis Khan, or like, you know, Alexander the Great.

00:34:19.059 --> 00:34:27.230
But actually Abu Bakr, who was the first caliph, or the successor to the prophet Muhammad after his death.

00:34:28.409 --> 00:34:43.300
And this is actually the kind of the genesis, if you will, of the split between Sunni and Shia, for those who don't know, is that after the prophet Muhammad died, there was no clear line of succession, especially because he didn't have a male heir.

00:34:43.760 --> 00:34:45.179
So it's kind of like"Game of Thrones"-ish.

00:34:44.860 --> 00:34:50.820
Now I will get nasty comments, because of comparing religion to"Game of Thrones".

00:34:51.239 --> 00:35:02.050
Anyway, the two main successors to the prophet were Abu Bakr, his father-in-law, and Ali who was his son-in-law and eventually Ali became a caliph.

00:35:02.050 --> 00:35:08.369
The fourth caliph, but there's a whole bunch of things which would require us to go into a history podcast at this point.

00:35:08.710 --> 00:35:24.119
But long story short is that, who was going to be the successor, whether it was gonna be Abu Bakr or Ali, was basically the initial cause of the schism, the split, which between Sunni and Shia Islam.

00:35:24.619 --> 00:35:32.079
But irrespective of all that the fact remains Abu Bakr became the successor to Muhammad.

00:35:32.659 --> 00:35:43.679
And he started going on this massive campaign of conquering, I wouldn't say the known Arab world, but pretty damn near, at least the entire Arabian peninsula and a bunch of other places.

00:35:44.260 --> 00:35:46.559
And famously he didn't lose a single war.

00:35:46.980 --> 00:35:53.519
So when a lot of people say, oh, who's the most winningest general: Genghis Khan or Alexander the Great, or who have you?

00:35:53.670 --> 00:36:01.150
Well actually it should be clear cut case that Abu Bakr is probably the greatest or most winningest general in all of human history.

00:36:01.849 --> 00:36:13.989
And during all these wars of Abu Bakr, he basically said, okay, one of the pillars of Islam is zakat, where you have to give 2.5% of your income of your wealth to Allah, right?

00:36:14.329 --> 00:36:22.340
And because he was the caliph, and it was a theocracy, that was essentially the tax or the charity that you would give to the State.

00:36:23.061 --> 00:36:25.579
Because the State was speaking directly on behalf of Allah.

00:36:25.920 --> 00:36:32.579
So from an economic standpoint, without getting too much into the religion, that's what basically financed the Empire, right?

00:36:32.760 --> 00:36:34.179
And it still stays to this day.

00:36:34.599 --> 00:36:37.769
One of the things that Muslims do or they're supposed to do, who provide zakat.

00:36:37.771 --> 00:36:43.690
As Christians would call it, they're supposed to give tithe to their local mosque or whoever.

00:36:44.309 --> 00:36:48.010
And compare that to Christians, who are supposed to technically give 10%.

00:36:48.539 --> 00:36:55.449
Maybe that's a higher percentage, but because hardly anyone does that, from an absolute standpoint, it's considerably less.

00:36:56.710 --> 00:37:08.840
So the obvious question would be: well, if interest is forbidden, then how do all these Arab theocracies or Arab religious countries, how do they have a banking?

00:37:08.860 --> 00:37:11.320
How do they have a financial system, if they can't charge interest?

00:37:12.309 --> 00:37:20.590
Well, they get around that by basically giving, quote,"interest free" loans, but they get a stake in the enterprise, that's asking the loan.

00:37:21.039 --> 00:37:31.909
Which, wink-wink, nudge-nudge, is the amount that corresponds to the interest that they would get, had they been a Christian, Jewish, secular whatever financial institution.

00:37:32.650 --> 00:37:48.059
And nowadays, if you go to Dubai or Riyad-- a lot of these places where they're trying to bring a lot of FinTech startups, a lot of the big FinTech startups in the Arab world is about how to do Sharia compliant FinTech.

00:37:48.061 --> 00:37:52.860
Because most FinTech apps are all about how to charge interest, right?

00:37:52.860 --> 00:37:53.659
That's how you make money.

00:37:53.760 --> 00:38:03.289
So this is a way you can still make money as a FinTech startup, but you do it in a way that Sharia compliant, where technically you're not charging interest.

00:38:03.429 --> 00:38:06.130
So it's all, it's all halal, it's not haram.

00:38:06.179 --> 00:38:06.530
Right?

00:38:07.309 --> 00:38:12.090
But anyway, long story short, this shapes Erdogan's, view.

00:38:11.811 --> 00:38:22.280
But because Turkey is obviously a secular country, or at least it's supposed to be, it's institutions, especially it's banking and economic sector, obviously interest is being charged.

00:38:22.579 --> 00:38:24.320
But Erdogan detests interest.

00:38:24.739 --> 00:38:27.039
And if he could, he would eradicate it.

00:38:27.260 --> 00:38:32.119
But there's institutional inertia history there that he can't fully get rid of.

00:38:32.659 --> 00:38:39.320
But in his worldview, he's constantly trying to lower the interest rate, because it's haram to him in his eyes.

00:38:39.980 --> 00:38:46.000
That's the story that most people will give you on that, on why he refuses to raise the interest rates.

00:38:46.030 --> 00:38:53.519
Even though every classical economist under the sun will tell you: obviously just raise interest rates and this thing will all be over.

00:38:54.570 --> 00:38:57.869
But the thing is, is this actually true?

00:38:58.650 --> 00:39:05.230
And one of the things I want to do with this podcast as we go forward, is mix and match different things.

00:39:05.231 --> 00:39:18.139
Whether it's politics, social issues, geopolitical issues, international diplomacy, economics, military warfare, obviously, but constantly do a rotation, so it doesn't really get stale.

00:39:18.639 --> 00:39:20.780
But we're going to revisit a lot of the things.

00:39:20.840 --> 00:39:30.219
And one of the things we're going to revisit, well, especially when we have episodes, focusing on economics, is about the flaws of classical economics.

00:39:30.920 --> 00:39:40.250
And here I'm going to initially say, come on, don't bullshit me! You know, Erdogan is bullshitting us with this lower interest rate.

00:39:40.710 --> 00:39:44.170
But I'm going to pause here and say, is he really bullshitting us?

00:39:45.480 --> 00:39:52.289
Because is the classical theory true that raising interest rates reduces inflation?

00:39:53.389 --> 00:40:06.159
And I'm going to try to take the mindset of Curtis LeMay: all institutional and historical inertia tells you to do a high altitude precision bombing, right?

00:40:06.670 --> 00:40:14.159
This is the way when Germany is the battlefield, where all military theories are tested, whether they're bullshit or not, it becomes readily apparent.

00:40:14.860 --> 00:40:18.949
Now you are Curtis LeMay and you're saying, okay, this is what everyone's telling me.

00:40:18.980 --> 00:40:20.550
Obviously, this is what history's telling me.

00:40:20.550 --> 00:40:22.429
This is what my rational brain is telling me.

00:40:22.460 --> 00:40:23.269
This is what to do.

00:40:23.570 --> 00:40:26.989
But I'm in a different area now, should I still be doing this?

00:40:27.610 --> 00:40:35.110
And that's what I want to talk about here is that classical economics, for the reasons that we stated it's quite evident clear cut.

00:40:35.429 --> 00:40:36.269
It totally makes sense.

00:40:37.070 --> 00:40:42.260
Raise interest rates, which means it discourages spending and encourages savings.

00:40:43.239 --> 00:40:45.619
And obviously that should decrease inflation.

00:40:46.199 --> 00:40:57.179
That's not controversial, but we need to understand the theories and assumptions that underpin that chain of thought and see if that actually applies to Turkey, just like LeMay did with Japan.

00:40:57.181 --> 00:41:02.849
because the theories assumptions in Germany did not necessarily apply to Japan.

00:41:11.949 --> 00:41:15.010
The assumption from classical economics comes from...

00:41:15.550 --> 00:41:22.559
One of the big underpinnings of classical economics is the quantitative theory of money: MV= PQ.

00:41:22.889 --> 00:41:33.880
Which is the amount of money you have-- the M, times the velocity of money(V), how fast it exchanges hands, equals the price level(P) times the quantity of goods that are in an economy(Q).

00:41:34.460 --> 00:41:39.599
And of course on average, all things being equal, V and Q are constant.

00:41:40.420 --> 00:41:42.559
So all that's left really is M and P.

00:41:42.900 --> 00:41:47.159
So if you increase M, if you increase the amount of money, your prices go up, right?

00:41:47.900 --> 00:41:49.960
And that's kind of like what inflation is, right?

00:41:49.960 --> 00:41:53.469
Inflation is too much money chasing too few goods.

00:41:53.889 --> 00:41:54.789
That's the whole thing.

00:41:55.329 --> 00:42:03.349
But the thing there, and probably you've already guessed by now, is the V and the Q are not actually constant in real life.

00:42:03.889 --> 00:42:10.070
It makes good for economics 101 and for neat little theories, because the math is pretty straightforward.

00:42:10.889 --> 00:42:24.380
But that assumption of classical economics implies that the quantity of goods can't increase, which in macro economic standpoint means that you have full employment.

00:42:25.250 --> 00:42:28.940
Your labor force is completely being used to produce goods.

00:42:29.480 --> 00:42:33.099
In classical economics we like to talk about comparative advantage.

00:42:33.690 --> 00:42:38.090
Or they talk about, oh, you're on island and you have bananas and oranges.

00:42:38.469 --> 00:42:41.969
And your buddy's on another island, and he has bananas and oranges.

00:42:42.760 --> 00:42:50.690
Your island is bigger than his island, so you have potentially more trees than his island, where he doesn't have enough space for enough trees.

00:42:51.070 --> 00:42:57.039
But the thing is, his climate is better for oranges, and your climate is better for bananas.

00:42:57.539 --> 00:43:06.320
So even though you can make more oranges than him, you let him completely focus on doing oranges and you completely focus on bananas.

00:43:06.619 --> 00:43:21.150
And comparative advantage states that even though you're not doing the thing that you're obviously better at than him, because he's doing it from a relative stand point, he's completely focusing on that, the amount of bananas and orange is total between the two of you actually increases.

00:43:22.010 --> 00:43:23.710
That's the whole point of comparative advantage.

00:43:23.849 --> 00:43:28.150
And comparative advantage introduces, the concept that trade is good.

00:43:28.579 --> 00:43:35.380
Free trades is good, because it, it improves the real welfare if you will, of all citizens, right?

00:43:35.840 --> 00:43:46.940
But again, the assumption here in that very basic example is that you're using your entire island for bananas and he's using his entire island for oranges.

00:43:47.239 --> 00:43:50.019
So there's no room to increase the capacity.

00:43:50.920 --> 00:43:52.820
And that's not a bad assumption, right?

00:43:53.059 --> 00:44:01.250
Actually, that's what we wanna strive to, because if we have all this potential, we wanna realize all the potential because then we become richer, right?

00:44:02.110 --> 00:44:10.769
So again, the fundamental assumptions behind classical economics is that you're using all your resources, which makes ideas like comparative advantage make sense.

00:44:11.469 --> 00:44:12.889
And again, that's a nice thing to have.

00:44:12.891 --> 00:44:17.280
'Cause why wouldn't you want to realize all the potential of your land, right?

00:44:17.280 --> 00:44:18.159
Of your society.

00:44:18.539 --> 00:44:26.360
And if we're going back to the islands example, why settle for growing four trees, if your island can support six trees, right?

00:44:26.360 --> 00:44:32.519
Grow six trees to produce the maximum amount of produce,'cause everyone becomes richer for that.

00:44:33.239 --> 00:44:34.760
The land can support it, obviously do it.

00:44:35.420 --> 00:44:45.119
So the underpinning behind classical economics is that you can't increase your quantity of goods, because you're using the maximum amount of goods available.

00:44:45.550 --> 00:44:49.039
It's a zero sum game, which is why comparative advantage works.

00:44:49.099 --> 00:44:54.590
Is that for every orange I produce, I can't produce X amount of bananas.

00:44:55.130 --> 00:45:08.510
So rather than waste my resources on oranges, let my friend, whose island is better at producing oranges, let them use it because zero sum game, I'm losing that land for potential banana production.

00:45:08.510 --> 00:45:14.019
Because with that land where I can only grow one orange tree, I can grow two banana trees, right?

00:45:14.440 --> 00:45:15.579
That's comparative advantage.

00:45:16.239 --> 00:45:25.619
But the thing is, again, using all your resources, while again, that's a very noble utopian concept of classical economics, frankly, that's not true in the real world.

00:45:26.360 --> 00:45:29.659
Because as much as we like it, we're not using all of our resources.

00:45:29.739 --> 00:45:33.610
I mean, frankly, using all our resource would be disastrous, because there's no slack.

00:45:33.971 --> 00:45:38.449
Not to mention economic conservation and all those other random things there.

00:45:38.630 --> 00:45:45.769
But just even if it was possible in some like Ayn Rand paradise, where everything is being used by Acme Inc.

00:45:46.860 --> 00:45:47.730
We're not that case.

00:45:47.869 --> 00:45:59.360
And you can easily point to this, because the mere fact that we have unemployment or even underemployment means there are people not doing stuff, which means that's resources not being used, labor not being used.

00:45:59.619 --> 00:46:01.000
Things are not being produced.

00:46:01.780 --> 00:46:04.320
And this is where classical economics breaks down.

00:46:05.059 --> 00:46:25.110
I'm not trying to say classical economics is wrong or I should say, well, I mean, it is wrong, but I don't want to say classical economics is bad, because we should all aspire to a utopian society, where classical economics is the reality and we're using all the things that God has given us, if you will, and we're not wasting anything.

00:46:25.110 --> 00:46:30.429
And we're producing the max amount of wealth for our society, for ourselves and for our citizens.

00:46:31.170 --> 00:46:32.710
But it's just that we're not there.

00:46:32.730 --> 00:46:41.940
And we have to deal not with what we want, but as Donald Rumsfeld, may he rest in peace, would say, you don't fight with the army you want, you fight with the army you have.

00:46:42.639 --> 00:46:48.179
So we can't run economics based on theories that we want or that sound nice.

00:46:48.181 --> 00:46:50.940
We have to run economics based on situations on the ground.

00:46:51.369 --> 00:46:52.900
Just like LeMay with Japan.

00:46:54.309 --> 00:46:57.449
And the point here is that unemployment is an issue.

00:46:57.451 --> 00:47:07.449
It's wasted resources from a sociological liberal peacenik standpoint it's bad, because obviously people don't have money and they're poor and everything like that.

00:47:07.710 --> 00:47:18.800
But from a pure cold calculated economic standpoint, it's also bad because you're not fully utilizing your resources, which means your Q is not maximum.

00:47:18.909 --> 00:47:20.079
Your Q is not constant.

00:47:20.579 --> 00:47:29.760
So in that classical economics equation of exchange, where the Q-- the quantity of goods, goods and services, is not constant.

00:47:30.019 --> 00:47:31.400
It can move up and down.

00:47:31.860 --> 00:47:39.159
It can drop, which means more unemployment, or it can rise, which means less unemployment, right, and more stuff is being used.

00:47:40.059 --> 00:47:46.679
And we'll have other podcasts about this too, but there's also a lot of things, like why crypto coins are bullshit.

00:47:47.780 --> 00:47:51.550
I'm not talking about blockchain-- there might be some use for blockchain.

00:47:51.969 --> 00:48:06.230
But the actual cryptocurrencies, or even this whole abolishing the Fed, this libertarian paradise of we're just gonna abolish the fed and go back to the gold standard-- they're all nice concepts in theory.

00:48:07.349 --> 00:48:10.940
Well obviously they're in good in theory, because that's what theory is-- everything sounds nice in theory.

00:48:11.199 --> 00:48:16.900
But they are nice in theory, but in reality, they're just at best bad, at worst super malicious.

00:48:17.170 --> 00:48:18.780
Because the world doesn't work like that.

00:48:18.780 --> 00:48:23.980
Because people think that money is exchanged like barter.

00:48:23.981 --> 00:48:31.889
Like it's back during the American Colonial days, where you have beaver pelts and you're trading with the native Americans for some corn, right?

00:48:32.420 --> 00:48:33.650
Money is not like that.

00:48:34.219 --> 00:48:37.730
Money is not a medium of barter, it's credit.

00:48:38.909 --> 00:48:46.130
The economy, even though it's simplistic, simplistic obviously sounds good and it's easier to understand, it doesn't necessarily mean it's right.

00:48:46.550 --> 00:48:52.480
But from simplistic viewpoint, people think, okay, money it's like barter, right?

00:48:53.159 --> 00:48:54.880
I give you A and you give me B.

00:48:54.880 --> 00:48:58.960
And that A happens to be money: dollars, euros, yen, whatever.

00:48:59.659 --> 00:49:08.079
Or if it's gold standard, and a lot of libertarians talk about: forget about the government, we should go back to gold standard and go back to barter.

00:49:08.880 --> 00:49:12.789
I give you gold pieces and you can give me, you know, beaver pelts, right?

00:49:13.369 --> 00:49:15.710
But the thing is, that's not how economics works.

00:49:16.130 --> 00:49:18.550
Or I should say, that's not how global economics works.

00:49:19.260 --> 00:49:30.909
Because while between you and some guy, it may appear like barter is working, in reality, the exchange of goods and services, which is obviously the underpinning of all economics, that takes time.

00:49:31.210 --> 00:49:33.539
There's a time delay in all transactions.

00:49:34.199 --> 00:49:39.059
And for all the accountants that are listening or anyone who's dealing with corporate finance knows this.

00:49:39.061 --> 00:49:49.860
You have accounts receivable, accounts payable, and there's a difference between your Income Statement, which is the money that you're entitled to, and your Free Cash Flow statement.

00:49:50.610 --> 00:50:08.929
Also just in general, if you're an entrepreneur or in charge of a PNL, you know this, that there's a delay between you spending money to acquire resources, whether it's humans, you know, employees, or just working capital, and the time for that working capital to be put into use.

00:50:09.550 --> 00:50:13.719
And then eventually you produce the good and sell it and then get the money.

00:50:13.940 --> 00:50:17.400
So there's a time between you spending money and the time that you receive money.

00:50:17.750 --> 00:50:26.840
That delay contributes to the time delay in exchange of, I would say modern economics, but just even ancient economics.

00:50:27.320 --> 00:50:27.880
Economics in general.

00:50:28.400 --> 00:50:37.800
I want to do a podcast about this, about the actual nature of money, but I can't do this now, because this will be another two hours and we're going to go into the Old Testament and a whole bunch of things in there.

00:50:37.800 --> 00:50:39.280
And you're like, what the hell does old Testament have to do with it?

00:50:39.769 --> 00:50:41.119
Trust me, it has to do a lot.

00:50:41.380 --> 00:50:48.510
But I'm trying to keep myself grounded here, so this doesn't become like another AUKUS podcast where it goes over an hour plus.

00:50:49.000 --> 00:50:49.710
Which it probably will.

00:50:49.710 --> 00:50:52.670
I don't know, my producer will tell me what the final count is.

00:50:53.289 --> 00:50:59.750
Anyway, so there's a time delay between money spent and money received.

00:51:00.210 --> 00:51:09.579
And in order for economics to work, there has to be the financial sectors there to facilitate or to bridge the gap between that time delay.

00:51:10.050 --> 00:51:17.619
Because I can't just go to a worker who's been working and say, Hey, look, as soon as our customer pays us for the products...

00:51:17.949 --> 00:51:19.820
Let's just talk about the banana tree, right.

00:51:20.360 --> 00:51:24.099
As soon as the guy from Orangina Land pays for my bananas...

00:51:24.880 --> 00:51:41.570
I'm gonna ask you to work on this island and grow all the bananas and you're gonna do it for free, but I totally promise you, that once the guys from the Orange Land pay me money, you're gonna get that money for all the work that you did, growing the bananas, right?

00:51:41.670 --> 00:51:42.570
It doesn't work like that.

00:51:43.030 --> 00:51:57.519
So what you need to do is go to the financial sector of your island and the financial sector, what their job is is to say, Hey, look, we know you're good for the money because you obviously have contracts and you're an established business.

00:51:58.010 --> 00:52:05.960
We're gonna give you a short-term loan for like 30 days or whatever, and you're gonna use that to pay for your workers, right?

00:52:06.099 --> 00:52:12.630
And then after you get your money from, from your consumer, then obviously then you pay us back, plus interest.

00:52:13.170 --> 00:52:14.070
That's usually how it goes.

00:52:14.070 --> 00:52:21.070
And we're not even talking about long-term the investments, because obviously we can further complicate it, talking about savings and investments.

00:52:21.090 --> 00:52:28.869
And this is actually one of the things that they're talking about with Erdogan and the collapse of the lira is that in order to make an investments, you have to save.

00:52:29.639 --> 00:52:31.260
But that's actually wrong.

00:52:31.840 --> 00:52:34.019
You don't save first to have investments.

00:52:34.021 --> 00:52:38.219
First you make the decision to invest and then you save that money.

00:52:38.719 --> 00:52:39.739
At least as a business.

00:52:39.740 --> 00:52:40.500
That's what you do.

00:52:40.840 --> 00:52:44.059
So it's not that you need savings to invest.

00:52:44.289 --> 00:52:51.610
It's just savings are the score sheet or the materialization of an ethereal decision to invest.

00:52:51.710 --> 00:52:55.730
So it's kind of like the accounting mark of investments.

00:52:56.630 --> 00:53:07.170
So you make the decision to invest first, then you save the money and then when you can actually purchase whatever machine that you're going to do, you obviously pay it all from your savings.

00:53:07.719 --> 00:53:10.400
From a simplistic standpoint, you say, oh no, that's stupid.

00:53:10.460 --> 00:53:11.920
You gotta save first.

00:53:12.539 --> 00:53:13.519
And then you invest.

00:53:13.579 --> 00:53:25.840
But the point is, again, if you're going into a business or any financial venture, is that the decision to invest always comes first and you either take time to accumulate savings or you take out a bank loan.

00:53:26.300 --> 00:53:30.159
And this again goes back to the whole point of the time delay of exchange.

00:53:30.699 --> 00:53:32.840
And in fact, you don't even have to take my word for it.

00:53:33.059 --> 00:53:35.440
You can go to the IMF or world bank.

00:53:35.710 --> 00:53:37.199
There's tons of papers out there.

00:53:37.500 --> 00:53:44.199
And they talk about how the whole point of trade finance is this bridging of the time delay between credit and debit.

00:53:45.309 --> 00:54:01.150
This time delay of exchange and trade economics, or just economics in general, is reliance on the short-term financing that bridges this time delay of exchange and most business transactions.

00:54:01.179 --> 00:54:07.099
Like I think it's like over 90% of global transactions take this form.

00:54:07.760 --> 00:54:12.699
The point is, to bridge this gap, you need this financial sector, because they bridge the gap.

00:54:12.730 --> 00:54:22.460
They allow the seller to borrow, in economic parlance term it's called working capital, to complete the order that they received so that the purchase can happen.

00:54:22.760 --> 00:54:27.690
So this either happens through the short-term loans or credit insurance.

00:54:28.429 --> 00:54:44.449
But either way, again, over 90% of trade in the world falls under this category of this time delay of exchange, where the short-term credit is basically the fuel that drives the engine of international trade.

00:54:45.309 --> 00:54:47.440
And what does this have to do with barter and gold?

00:54:48.030 --> 00:54:53.119
Well, the thing is, even if it was, you know, you had gold standard again, you had this libertarian paradise.

00:54:53.789 --> 00:54:54.559
Well, okay, fine.

00:54:54.561 --> 00:55:08.190
Well, there's still this time delay of exchange where there's the time where you have to spend to extract the gold to pay people, or hire the work to extract it for you.

00:55:08.650 --> 00:55:10.869
At that point, you don't have gold, you got to get the gold.

00:55:11.250 --> 00:55:13.309
And then after that, then you can start paying.

00:55:13.489 --> 00:55:15.550
But then you're saying, no, no I'm already rich or whatever.

00:55:15.590 --> 00:55:16.349
I already have gold.

00:55:16.579 --> 00:55:17.469
Well, okay, fine.

00:55:17.769 --> 00:55:18.710
You already have the gold.

00:55:18.730 --> 00:55:27.980
But again, there is another shortcoming of classical economics is that its theories are based on static systems, that it is frozen in time.

00:55:28.079 --> 00:55:31.179
So then, okay, you have this gold, you paid it in advance.

00:55:31.480 --> 00:55:39.539
You paid the the workers for the bananas, but you're still waiting on the payment of the oranges.

00:55:39.541 --> 00:55:40.739
There's a time delay there.

00:55:41.079 --> 00:55:52.090
And oh, by the way, even after that exchange is complete, well then the next season, you need to acquire gold again to pay the workers for the bananas and then get oranges again.

00:55:52.150 --> 00:55:54.050
And then so on and so forth and repeats.

00:55:54.309 --> 00:55:59.929
So because we don't just do one economic exchange in our life and then drop dead.

00:56:00.030 --> 00:56:03.730
We do multiple things over, hopefully, a long fortuitous life.

00:56:04.389 --> 00:56:06.010
The economics is dynamic theory.

00:56:06.389 --> 00:56:09.159
So even if you have an initial capital.

00:56:09.380 --> 00:56:12.400
Say, you know, you've been blessed with rich parents, like Elon Musk.

00:56:12.489 --> 00:56:22.719
Eventually there's gonna be a point where you have to acquire capital, before you can spend it and realize your economic gains, that classical theory promises us.

00:56:23.820 --> 00:56:28.599
So that's why this time delay of exchange is important.

00:56:28.739 --> 00:56:30.719
And you just can't think of things as bartering.

00:56:31.219 --> 00:56:34.119
And again, 90% of global trade...

00:56:34.579 --> 00:56:58.750
And when you're actually talking about it on the scale of sovereign nations, which obviously we're talking about that with the case of Erdogan, of Turkey, of sovereign nation, I would say near a 100% of global international transactions involve some form of either credit or some credit insurance, or some sort of guarantee to facilitate the business transactions on a global scale.

00:56:59.409 --> 00:57:01.269
So, why is this important?

00:57:01.780 --> 00:57:18.380
Because the thing is, just like with inflation, one of the assumptions in classical economics, when it comes to theory, is that there should not be persistent long- term trade imbalances, all trade should be equalized.

00:57:19.199 --> 00:57:32.090
And we know that's bullshit, because America obviously has persistent trade deficit, Germany and China famously have trade surpluses, Greece has a trade deficits.

00:57:32.619 --> 00:57:37.650
Trade imbalances, whether it's a surplus or a deficit, are just the common fact of life.

00:57:38.110 --> 00:57:44.320
And there's no free market voodoo force out there, pulling everything back to the center.

00:57:44.900 --> 00:57:52.400
And I'll explain why, but first let's run through with the classical theory and to use an example to illustrate the classical theory.

00:57:52.409 --> 00:57:58.519
Let's use USA and Germany, USA being an importer, obviously, and Germany being an exporter.

00:57:58.699 --> 00:58:07.269
And to further clarify this, so that there's no confusion about Euro, because it's not really Germany's currency, let's talk about 1990s Germany, right?

00:58:07.409 --> 00:58:10.070
So we'll talk about the Deutsche Mark and the Dollar.

00:58:11.210 --> 00:58:12.469
To make things less confusing.

00:58:13.650 --> 00:58:30.420
All right, so if USA is buying all this stuff from Germany, that Germany is exporting out, then that means, obviously United States or, you know, the world economy, Americans, are trying to sell all their dollars and buy all these Deutsche Marks so they can get all these German goods.

00:58:30.800 --> 00:58:36.380
And obviously law of supply and demand, you're selling dollars, so the value of the dollars is gonna go down.

00:58:36.679 --> 00:58:40.219
And you're buying Deutsche Marks, so the value of the Deutsche Marks is going to go up.

00:58:40.610 --> 00:58:51.250
Well, the more Germany exports and the more US import from Germany, that the value of the Deutsche Mark is going to go up and up and up and up.

00:58:51.349 --> 00:58:53.250
And the Dollar is going to go down and down, down, down.

00:58:53.429 --> 00:59:05.849
And all of a sudden there's going to be a tipping point, where all of a sudden now the goods in the United States, because the dollar is so low, it's going to become cheaper for Germans to buy from the Americans, rather than just buying in Germany.

00:59:06.579 --> 00:59:15.559
And also the Americans are just going to, frankly, just going to stop buying stuff from Germany, because the Deutsche Mark is so valuable, that it's going to be too expensive.

00:59:15.561 --> 00:59:20.239
They're saying, well, I'm not going to spend all my Dollars converting them to Deutsche Mark, because it's too expensive.

00:59:20.539 --> 00:59:22.079
I'm just going to buy this stuff in the United States.

00:59:22.300 --> 00:59:23.320
So there's going to be a shift.

00:59:23.579 --> 00:59:32.719
And now all of a sudden, Germans are going to start buying stuff from the Americans, so they're going to sell their Deutsche Marks, and they're going to to acquire, they're gonna try to buy US Dollars.

00:59:33.659 --> 00:59:35.519
And the Dollar is going to start going up.

00:59:35.539 --> 00:59:38.559
And then the Deutsche Marks are going to go back until the flip.

00:59:38.579 --> 00:59:40.320
And then back to where we were originally.

00:59:41.230 --> 00:59:46.510
So there's this constant oscillation, but on average, long- term average, all trades should be balanced.

00:59:46.769 --> 00:59:56.190
That's what classical theory states and in a barter economy where you're just buying and selling immediately when there's no time delay of trade.

00:59:56.619 --> 00:59:57.349
That makes sense.

00:59:57.489 --> 01:00:00.230
That's why it's called conventional economics, because it's conventional.

01:00:00.231 --> 01:00:02.059
This is what we all believe in.

01:00:02.250 --> 01:00:03.860
Most of us mostly believe in.

01:00:03.701 --> 01:00:10.019
But again, we can't ignore in the real world this time delay of exchange.

01:00:10.639 --> 01:00:17.739
And we don't just do bartering in international trade, because international trade is nothing without international finance.

01:00:18.679 --> 01:00:24.170
So it's not just that the Americans want to buy stuff from Germany.

01:00:24.349 --> 01:00:45.840
So they're gonna sell all their Dollars and buy Deutsche Marks, but before we get even a chance for the Americans to sell their Dollars and buy the Deutsche Marks, because of the time delay in exchange, what has to happen is that Germans, obviously, need money first to pay their workers, to actually produce the stuff that's being exported to the Americans.

01:00:46.500 --> 01:00:57.000
So the German financial system has to create a line of credit of Deutsche Marks, which increases the amount of Deutsche marks in the economy.

01:00:57.820 --> 01:01:02.869
And then the German manufacturers use that line of credit to pay their workers.

01:01:04.050 --> 01:01:11.550
Either pay their workers or pay for the investment or the capital goods, whatever, to produce the stuff that's going to be exported to the Americans.

01:01:12.329 --> 01:01:18.869
And only then they give it to the Americans and the Americans then sell their Dollars and then buy Deutsche Marks to pay them.

01:01:19.090 --> 01:01:25.059
And of course, then the producer gets those Deutsche marks and then pays back that line of credit to the financial bank.

01:01:25.440 --> 01:01:26.659
That's actually how it goes.

01:01:27.119 --> 01:01:34.579
So what classical economic states is that okay, the value of Deutsche Marks should be increasing, because there's a higher demand for it.

01:01:35.300 --> 01:01:48.650
Well, actually in order for trade to work, the overall amount of Deutsche Marks has to increase, because again, the bank, the financial institution that's extended that line of credit, is increasing the number of Deutsche Marks in the system.

01:01:48.829 --> 01:01:57.289
So if there's more Deutsche marks, well obviously as we know from, ironically, classical economics, then the more there is of something, the less valuable it is, so that's going to drop down.

01:01:57.510 --> 01:02:06.039
And because there's a 1:1 exchange, meaning that the line of credit that's being created to produce the export gets immediately wiped out...

01:02:06.550 --> 01:02:13.400
Well, not immediately, but it gets wiped out after the trade has happened, when the Americans pay for the export, it goes away.

01:02:13.420 --> 01:02:24.280
So then the Deutsche Mark increases in value again, but that initial drop of value from the line of credit is counterbalanced by the increase in value from the export.

01:02:24.460 --> 01:02:30.840
But the net effect is that the level of the Deutsche Mark, compared to the Dollar, is the same it's static.

01:02:31.380 --> 01:02:37.159
So when we extend this to a broader standpoint, that explains why we have trade imbalances in the world, right?

01:02:37.161 --> 01:02:44.550
And that's why America consistently runs deficits and countries like Germany, China, or whatever, consistently run surpluses.

01:02:44.550 --> 01:02:56.989
Because for every export, there has to be an additional increase of credit or an increase in monetary vehicles, monetary currency units to facilitate that trade to happen.

01:02:57.489 --> 01:03:03.820
And because that balances it out, that oscillation theory that we talked about in classical economics doesn't work.

01:03:03.820 --> 01:03:07.579
That's precisely because of this time delay of exchange.

01:03:14.199 --> 01:03:16.179
So what does this have to do with Turkey?

01:03:17.050 --> 01:03:25.610
Well, I was being a little cheeky there, because the thing is, the credit is not a perfect one for one balance, because obviously why would the bank do this?

01:03:25.639 --> 01:03:31.210
It's not like out of their own pure benevolence, they're good people and they're like, yeah, we will totally give you credit and you do it.

01:03:31.239 --> 01:03:33.409
They're charging an interest, so they're making money.

01:03:33.989 --> 01:03:42.239
And because usually this type of trade financing is done under 30 days or what have you, the short-term horizon, so it falls under the short-term rates.

01:03:42.510 --> 01:03:44.800
Well, what also is the short-term rate that we think about?

01:03:45.139 --> 01:03:47.880
Oh, the interest rates of the Central Bank of Turkey.

01:03:48.019 --> 01:03:51.199
Or Central Banks of countries in general, right?

01:03:51.230 --> 01:04:07.230
Because the thing is interest rates that the Central Banks set are, essentially, the floor, the price floor or the minimum interest that banks will charge, because obviously they're not gonna charge lower because why would they do that if the central bank is paying higher.

01:04:07.610 --> 01:04:10.469
So if the interest rate in the United States is..

01:04:10.989 --> 01:04:12.789
Or right now it's 0%, so that's a bad example.

01:04:13.289 --> 01:04:16.630
But okay, in Turkey the interest rate is 15%.

01:04:17.460 --> 01:04:19.590
Then the cost for financing...

01:04:19.590 --> 01:04:27.019
Again, financing is not something, oh it's a nice to have-- it's the essential, like we just talked about it's the essential lifeblood of trade.

01:04:27.679 --> 01:04:36.539
Is that for any financing that's going to occur to facilitate international trade with Turkey, the minimum cost of that is 15%.

01:04:36.880 --> 01:04:44.849
So by increasing the cost of financing for trade, because everyone keeps saying, oh yeah, increase interest rates, because that's going to reduce inflation...

01:04:46.000 --> 01:05:02.440
Just like there's an extension of credit to the exporter so they can build their goods and what have you, there's also a similar line of credit extended to the importer, to the Americans, so they can actually buy what they have to buy.

01:05:02.440 --> 01:05:08.559
Because on their side, they also have a time delay of money from whatever resources that they're doing within the United States.

01:05:08.820 --> 01:05:20.400
And of course that position, likewise, gets closed out at the end of the exchange so that the net result of the movement of currency or the valuation of the currency remains zero.

01:05:21.059 --> 01:05:35.599
So going back to our comparative advantage lesson, while comparative advantage is a very good thing to learn about in classical economics, because of this time value of credit comparative advantage does not matter.

01:05:36.579 --> 01:05:37.789
It's not a zero sum game.

01:05:37.860 --> 01:05:49.190
What matters is the absolute advantage matters, because there can always be an expansion of Q-- of the quantity of goods or financial aspects.

01:05:49.670 --> 01:05:51.829
There can always be an expansion of financial credit.

01:05:52.289 --> 01:05:56.309
So more money can always be created or more goods can be created.

01:05:56.530 --> 01:06:16.659
And because presumably with trade finance that credit doesn't get expanded unless there's actually goods and services to be traded, so from a trade financing standpoint, inflation is not necessarily a concern, because it only appears to facilitate the trade of the real goods and services that comes about.

01:06:17.199 --> 01:06:18.289
So that's the point here.

01:06:18.909 --> 01:06:21.929
And this is why these trade imbalances exist.

01:06:22.070 --> 01:06:32.570
And so when we come back to Turkey, it's that they're saying, oh, well the currency devalued, that means the price of Turkish exports should be favorable.

01:06:33.210 --> 01:06:37.010
Never mind, there's the economic scene, which will get to, is different.

01:06:37.010 --> 01:06:43.679
There's no healthy and robust economic infrastructure in Turkey to do a lot of exports and imports.

01:06:44.349 --> 01:06:50.119
Because in order for Turkey to export, there has to be things that other countries want to buy.

01:06:50.121 --> 01:06:50.440
Right?

01:06:51.019 --> 01:06:53.039
And also Turkey has to be able to produce it.

01:06:53.420 --> 01:07:09.150
But even assuming that that's the case, because of this extension of credit that we just explained to facilitate trade, you can readily see that raising interest rates will not help Turkish situation.

01:07:09.210 --> 01:07:10.349
If anything, it will harm.

01:07:10.429 --> 01:07:12.469
I mean Erdogan, well he's wrong.

01:07:13.039 --> 01:07:14.230
There are reasons why he's wrong.

01:07:14.231 --> 01:07:18.949
But at the cursory, the end results of actually lowering interest rates is actually a good thing.

01:07:19.250 --> 01:07:31.579
Raising interest rates is not the thing you want to do, because if right now, if the interest rates in Turkey are 15%, well, that's the cost of financing for the facilitating of trade in Turkey, right?

01:07:32.079 --> 01:07:39.340
So if you raise the interest rate, then the cost of financing trade, the cost of doing economics, the cost to play the game is going to increase.

01:07:40.110 --> 01:07:44.849
And you're saying, well yeah, but that's good because you want to slow down the economy, right?

01:07:44.909 --> 01:07:46.849
You want to get a hold of inflation.

01:07:46.851 --> 01:07:47.570
That's the whole point.

01:07:47.929 --> 01:07:49.329
So that's why Erdogan i s i n t he problem.

01:07:49.710 --> 01:08:03.119
But again, now you're falling into the classical economics assumption trap of that the economy is fully being utilized and when it's being fully utilized, there's a zero sum game: for every give there is a take.

01:08:03.739 --> 01:08:12.320
But when you consider Turkey having double digit unemployment, well clearly the classical economics assumptions don't stand.

01:08:12.590 --> 01:08:16.199
There's always room for increase in productive capacity.

01:08:16.500 --> 01:08:17.960
So it's not a zero sum game.

01:08:18.460 --> 01:08:23.039
So it's not a question of, okay, all the resources are being used up in Turkey.

01:08:23.539 --> 01:08:29.520
So like the economy is doing so great, so we've got to raise the interest rates and cool down the economy.

01:08:30.100 --> 01:08:31.560
The economy is already cold.

01:08:31.979 --> 01:08:37.149
So raising the interest rates, yes, it's going to cool it down, but it's going to make things even worse.

01:08:37.739 --> 01:08:43.029
This is kind of like similar to what happened with the Volcker shock in the 1970s in the United States.

01:08:43.609 --> 01:08:49.829
We had the situation: inflation was high in the United States and Volcker-- the Fed chairman...

01:08:50.699 --> 01:08:55.539
Well before him, they were trying to raise the interest rates, but inflation was still going up.

01:08:55.880 --> 01:09:00.659
So hi finally said, screw it, I'm gonna raise the interest rates to a ridiculous point.

01:09:01.279 --> 01:09:10.539
And sure enough, he finally did eventually get the inflation down, but in the process, unemployment shot through the roof and it completely destroyed the American economy.

01:09:11.130 --> 01:09:15.300
Fortunately United States is a pretty robust country, so that we rebounded.

01:09:16.710 --> 01:09:22.369
But if you ask the people back then in the labor force, was what Volcker did good?

01:09:23.069 --> 01:09:23.689
No, it was not.

01:09:24.010 --> 01:09:25.689
In fact there were all these protests going on.

01:09:26.369 --> 01:09:31.729
If you remember back then, there's like news clippings, where there were protests all over the United States.

01:09:31.730 --> 01:09:47.760
And like even farmers, for example, parked, clogged up the streets of Washington DC by putting their tractors and what have you, and heavy machinery in front of the Federal Reserve building as a protest, because he just completely wrecked the United States economy.

01:09:48.350 --> 01:09:53.920
It's like, yeah, the economy slowed down, but you know, it's like telling someone, oh, you need to lose weight.

01:09:54.220 --> 01:09:58.069
But rather than then going on on exercise and diet, they chop off their legs.

01:09:58.699 --> 01:09:59.390
It's like, okay.

01:09:59.390 --> 01:10:03.869
Yeah, you reduced weight, but there're bigger problems now there.

01:10:04.409 --> 01:10:12.069
So that's the thing it's like, yes, you need to control inflation, but you can't do it at the expense of the economic health of your country.

01:10:12.850 --> 01:10:20.220
And the classical theory of raising interest rates to slow down economy is absolutely correct.

01:10:20.279 --> 01:10:21.979
And I'm not knocking it at all.

01:10:22.760 --> 01:10:29.340
But it does it at the behest of reducing consumption, and at the same point, reducing production.

01:10:29.341 --> 01:10:31.460
Consumption and production going hand in hand there.

01:10:31.880 --> 01:10:42.409
So if your economy is already shit in the sense of employment, which obviously in Turkey, unemployment is atrocious, raising interest rates to cool down the economy-- well, the economy is already freaking cold.

01:10:42.411 --> 01:10:44.130
You don't wanna go like absolute zero here.

01:10:44.949 --> 01:10:46.930
So that's the error that the people are making.

01:10:47.029 --> 01:10:49.050
So to Erdogan's credit...

01:10:50.010 --> 01:10:58.560
Well, I don't know if it is to his credit, I don't know if he's actually thinking this, because again, we already talked about his reasons are more having to do with his own religious economic theories.

01:10:58.659 --> 01:11:00.960
But besides the point, let's just steel- man this.

01:11:01.180 --> 01:11:07.960
To his credit, he's kind of right: you don't want to raise the interest rates, because inflation is not the end all-be all.

01:11:08.180 --> 01:11:11.520
The economy, the wellbeing of your citizens is what matters.

01:11:12.460 --> 01:11:17.680
And to make this more precisely, to bring this argument home, if the economy's like a pizza...

01:11:18.590 --> 01:11:23.560
Bear with me with the analogy here, it's not perfect, but food is not exactly economics, but okay.

01:11:23.859 --> 01:11:27.640
You have, you have your base pizza, which is essential to have.

01:11:28.039 --> 01:11:32.710
I'm not talking about the Chicago deep dish style pizza, I'm talking about real, real pizza.

01:11:33.069 --> 01:11:35.069
I don't have to say New York style, Brooklyn style.

01:11:35.300 --> 01:11:36.029
It's fricking pizza.

01:11:36.489 --> 01:11:43.590
But anyway, so for real pizza, you got your dough and then you got your sauce and your cheese, right?

01:11:43.591 --> 01:11:46.789
That's your absolute bare minimum for you to have.

01:11:47.130 --> 01:11:51.470
And then you could add other stuff on it: pepperoni, anchovies...

01:11:51.890 --> 01:11:55.619
Not pineapples, screw you, pineapples is not a freaking topping.

01:11:56.140 --> 01:11:58.020
But anyway, put whatever the hell you want on it.

01:11:58.020 --> 01:12:00.539
And you can put all the fricking toppings on that you want.

01:12:00.960 --> 01:12:04.979
But at the base of it, you have to have your pizza pie, right?

01:12:05.000 --> 01:12:06.979
You have to have your base ingredients.

01:12:06.980 --> 01:12:08.060
Otherwise it's no longer pizza.

01:12:09.079 --> 01:12:21.329
So with classical economics, assuming slowing down the economy, there's a specific base amount of economic activity that has to happen in a country for the country to function.

01:12:21.789 --> 01:12:30.090
You have to have water, you have to have at least bread or some basic substance, some food, a cursory amount of electrical energy.

01:12:30.840 --> 01:12:31.930
Keep the lights on.

01:12:32.590 --> 01:12:35.720
You have your base level of sanitation, whatever.

01:12:36.090 --> 01:12:37.039
These have to happen.

01:12:37.041 --> 01:12:38.439
You can't compromise on them.

01:12:38.440 --> 01:12:40.720
Because if not, then you basically, you have Somalia.

01:12:41.189 --> 01:12:42.880
Apologies to the Somalians listening.

01:12:44.420 --> 01:12:49.279
So everything else, all other economic activities, those are like the toppings on the pizza, right?

01:12:49.280 --> 01:12:50.640
You can have more, you have less.

01:12:51.100 --> 01:12:55.510
And that, that can fluctuate, but the country will still move on.

01:12:55.511 --> 01:12:56.989
People will still live.

01:12:57.409 --> 01:13:02.630
And this is kind of like what people talk about: living wage versus a minimum wage, and people should be able to live.

01:13:03.850 --> 01:13:11.109
All the extra economic activity, industry, commerce, whatever that goes on top of it-- that's all good.

01:13:11.110 --> 01:13:18.380
And you can play around with that because the base level of living of your citizens is still gonna progress.

01:13:19.239 --> 01:13:28.659
So this is the whole point of the distinction between developed nations, developing nations and underdeveloped nations, and also dysfunctional nations.

01:13:28.810 --> 01:13:39.329
Depending on who you ask, whether underdeveloped or underdeveloped nations, they don't have the base level of goods and services to provide for the general welfare of their citizens.

01:13:39.819 --> 01:13:43.369
Developing nations, generally speaking have most of it.

01:13:43.710 --> 01:13:45.289
And they have some extra economic activity.

01:13:45.729 --> 01:13:52.289
Developed nations, obviously have all that, plus you know, all that and a bag of chips, they have all the extra stuff.

01:13:52.291 --> 01:14:00.680
So you can play around with the economic output of the country and not affect the lifestyle or the quality of life of your citizens.

01:14:01.100 --> 01:14:13.840
So Turkey, obviously, it's not developed nation, but it is considered to be developing nation on the whole, where you have your customary goods and services, whether it's roads, energy, bread, water, et cetera.

01:14:14.579 --> 01:14:18.239
But obviously there is extra economic activity.

01:14:18.260 --> 01:14:24.840
But on a whole it's not robust enough to carry on as the main engine of the Turkish economy.

01:14:25.699 --> 01:14:30.989
The reason why this is important is that while the Americans or Europeans or what have you, Japanese.

01:14:31.659 --> 01:14:40.829
Hell, even the Chinese to a certain effect, can mess around with the levers of their national economies, Turkey doesn't have that Liberty.

01:14:41.340 --> 01:14:47.189
Because with the assumption in classical economics mean that, okay, the inflation is too high.

01:14:48.189 --> 01:14:50.029
Uh, so we need to slow down the economy.

01:14:50.670 --> 01:14:52.300
Well, if developed economy, okay.

01:14:52.500 --> 01:14:52.500
Yeah.

01:14:52.501 --> 01:15:01.539
You can afford to reduce your economic output, because the quality of your life, the essential economy, if you will, the pizza crust of your economy, that part is still going.

01:15:01.541 --> 01:15:02.899
You're not reducing that part.

01:15:03.579 --> 01:15:06.739
When using the losing the weight analogy, you're not chopping off your leg.

01:15:06.740 --> 01:15:09.659
You're, you're exercising, you're getting rid of your belly fat.

01:15:10.720 --> 01:15:13.449
But with Turkey, they don't have that.

01:15:14.210 --> 01:15:16.529
Businesses are underwater there.

01:15:17.310 --> 01:15:35.880
And trying to cool down the economy means that with developed nations definitely, and in most cases, or in some cases, with developing nations, you have a base level of economic activity that has to happen for a generally accepted quality of life for your citizens.

01:15:35.881 --> 01:15:36.680
Let's called that X.

01:15:37.460 --> 01:15:47.359
So anything above X you can play around with, and this is why classical economics say, Hey, inflation is too high, raise your interest rates to slow down the economy.

01:15:48.060 --> 01:15:51.119
And the assumption is that there's a lot of stuff above X.

01:15:51.420 --> 01:15:58.229
So you can slide the scale up and down still above that X level, that's necessary for quality of life.

01:15:58.970 --> 01:16:01.750
And that slows down the economy, which brings inflation back under order.

01:16:02.289 --> 01:16:04.710
But with Turkey, there's not much above the X.

01:16:04.810 --> 01:16:08.069
And some might even argue there's not even X for a lot of people in Turkey.

01:16:08.949 --> 01:16:11.149
Again, we got double digit unemployment.

01:16:11.409 --> 01:16:19.460
That's not even considering the underemployments-- the impoverished people who are technically employed, but don't have enough money for their basic goods and services.

01:16:20.119 --> 01:16:24.939
And in the population of their young people that unemployment is even higher.

01:16:25.100 --> 01:16:28.300
I think it's like 46% or something ridiculous like that.

01:16:28.609 --> 01:16:31.420
It's just insane how their young people are not working.

01:16:32.060 --> 01:16:35.529
Their most productive age group is not even employed.

01:16:35.789 --> 01:16:45.729
So cooling down the economy, while from a cold calculated economic standpoint, may definitely slow the economy.

01:16:45.920 --> 01:17:01.119
It's kind of like the Norden bombsight that was tested over the bombing ranges in Western US: Western US bombing ranges is not 1943 Berlin, you know, with the Luftwaffe and the anti-aircraft shooting at you.

01:17:01.470 --> 01:17:02.399
It's a real world.

01:17:02.539 --> 01:17:04.399
And that the laboratory are completely different.

01:17:04.840 --> 01:17:09.359
And the same thing here with classical economic theory and in this case, Turkey-- a developing nation.

01:17:10.300 --> 01:17:14.960
So what this means to the shopkeepers is that they still have to produce their work.

01:17:15.470 --> 01:17:16.399
It's not like your Facebook.

01:17:16.579 --> 01:17:24.000
And you're like, oh my God, the Fed increased the interest rate, so now I can't sell too many ads, so my economic output is lower.

01:17:24.340 --> 01:17:32.750
No, in Turkey, you actually have bakers and butchers who are trying to bake bread and meat to satisfy people's dietary needs.

01:17:33.329 --> 01:17:38.909
And you're saying, oh well, let's, let's increase the interest rates and slow down the economy.

01:17:39.590 --> 01:17:43.390
Well, people still need bread today and they're gonna need bread tomorrow.

01:17:43.529 --> 01:17:46.470
And they need meat today, and they're gonna need meat tomorrow.

01:17:46.939 --> 01:17:53.819
It's not like the economic output is going to decrease, because after a certain point you got rid of all your belly fat.

01:17:54.479 --> 01:18:02.180
If you keep exercising and running a caloric deficit, your body's gonna start metabolizing your muscles and then your organs, and then that's how starvation happens.

01:18:02.479 --> 01:18:07.460
So that's kind of like what's happening or that's what people are essentially asking Turkey to do.

01:18:08.000 --> 01:18:12.449
And even if that were the case, it doesn't work, because they're not gonna stop making bread.

01:18:12.560 --> 01:18:15.529
They're not gonna stop making meat or whatever.

01:18:15.949 --> 01:18:21.170
And again, because of the time delay of trade, the businesses are still going to be working.

01:18:21.590 --> 01:18:23.090
And inflation is already bad.

01:18:23.189 --> 01:18:24.569
Prices are already increasing.

01:18:24.570 --> 01:18:26.090
They barely are making ends meet.

01:18:26.460 --> 01:18:41.319
Increasing the interest rate means increasing the cost of financing, which we've already established is the lifeblood of facilitating trade in the first place, which means you're adding another, an extra artificial cost on an already overburdened economy.

01:18:41.649 --> 01:18:48.439
Which means the baker now not only is barely making ends meet, because the price of flour has skyrocketed.

01:18:48.579 --> 01:18:55.949
But on top of that, that short-term financing that he needs to get to be able to sell the bread, buy the flour and sell the bread.

01:18:55.951 --> 01:19:00.390
That time delay that financing from the bank, the loan is going to increase.

01:19:00.489 --> 01:19:03.149
So it's going to further burden him.

01:19:03.489 --> 01:19:08.069
And again, he can't, he doesn't have the option to not sell bread, because this is his livelihood.

01:19:08.070 --> 01:19:10.510
He doesn't have savings and people need bread.

01:19:10.511 --> 01:19:15.140
It's not like people are gonna stop eating or the sake of the economy humans have real needs.

01:19:15.680 --> 01:19:20.579
So that's why while classical theory is sound, I'm not saying classical theory is wrong.

01:19:20.890 --> 01:19:27.260
It's just, the assumptions are only applicable to a specific narrow case.

01:19:27.789 --> 01:19:35.850
Again, think like LeMay: what's good for the bombing range is not, not necessarily good for Germany, and it's definitely not good for a bombing campaign in Japan.

01:19:36.729 --> 01:19:39.369
And the same thing, classical theory might work in the laboratory.

01:19:39.609 --> 01:19:49.289
It may even work in some isolated cases with, uh, developed nations, but it doesn't work in a developing nation like Turkey, and specifically like with Turkey.

01:19:50.069 --> 01:20:00.960
And there are test cases of the, where Argentina, for example, they've been constantly increasing their interest rate to slow down their economy.

01:20:01.539 --> 01:20:05.079
And what's happening is the inflation is still going up and up and up.

01:20:05.609 --> 01:20:11.079
Japan, on the contrary, they have deflation and they're trying to increase inflation.

01:20:11.380 --> 01:20:16.079
So again, conventional economic theory says, okay, lower interest rates to have inflation.

01:20:16.500 --> 01:20:20.960
And they're basically at zero, well, there are negative interest rates now and they still have deflation.

01:20:21.069 --> 01:20:23.840
They haven't had inflation in almost 40 years now.

01:20:24.619 --> 01:20:34.590
So if we just get out of our American or Western bubble and see what other countries are doing, you can clearly see that classical economics doesn't work.

01:20:35.250 --> 01:20:37.949
And again, I'm not saying that classical economics is wrong.

01:20:38.579 --> 01:20:50.659
It's just, it's only correct in very specific isolated cases, where you have full employment, you have the full use of your economic power or your economic, uh, utility.

01:20:51.199 --> 01:20:55.380
And also that you have zero time delay in your exchange of goods and services.

01:20:56.319 --> 01:21:05.100
So if we're going to raise the interest rates in Turkey, the baker is still going to continue baking bread and trying to sell it.

01:21:05.100 --> 01:21:08.449
But of course, now it's gonna be even less of a profit or, or even at a loss.

01:21:09.329 --> 01:21:14.850
In companies, or whether it's industrial commercial companies, they still have to produce, because people still need their wages.

01:21:15.310 --> 01:21:17.970
But their costs, their profits are already low as it is.

01:21:18.399 --> 01:21:21.090
It's gonna be even lower or even the point where they can't handle.

01:21:21.350 --> 01:21:25.449
They actually just go under and then people lose their jobs.

01:21:25.909 --> 01:21:27.170
And in that case, well, okay.

01:21:27.279 --> 01:21:37.239
Yeah, you do have less money chasing fewer goods, but not because you've healthy, in a healthy manner, reduced inflation by reducing the money supply.

01:21:37.550 --> 01:21:47.520
What you did was people have been laid off, because companies can't afford to employ them or even worse, companies just shut down altogether, which means no goods are being produced.

01:21:48.000 --> 01:21:54.109
And if no goods are being produced well then yeah, sure, then by definition the demand is also zero, which means there's no inflation.

01:21:54.289 --> 01:21:56.470
So I guess, okay, congratulations.

01:21:57.210 --> 01:22:00.630
You've solved inflation, but at what cost?

01:22:11.149 --> 01:22:38.470
Going back to the time delay of trade, another interesting anecdote or tidbit on this is that it's kind of funny that if you look back in history or in recent history, a lot of the financing that caused the prosperity or that was the progenitor of the prosperity of Turkey, where people were talking about, oh look, Turkey is the model, developing nation, look at their economy and everything like that.

01:22:38.909 --> 01:22:43.430
A lot of that financing was around the 2008 timeframe.

01:22:43.770 --> 01:22:49.710
And when we're talking about long- term investing, the average time horizon for those type of debt instruments is usually 10 years.

01:22:50.399 --> 01:22:53.300
And when did the economy start going to shit in Turkey?

01:22:53.550 --> 01:22:54.979
Well, around 2018?

01:22:55.539 --> 01:23:01.140
And that's because what happens is when you have short-term financing...

01:23:01.140 --> 01:23:05.060
Again, it's not like classical theory where it's a static one and done deal.

01:23:05.270 --> 01:23:15.520
There's a constant flow of trade going on, which means there's constantly credit being extended and being extinguished as trade flows back and forth.

01:23:16.539 --> 01:23:21.560
And another thing about this interest rate is that these companies get financed on these bonds.

01:23:21.560 --> 01:23:24.789
With long- term bonds, obviously you have higher interest or rates.

01:23:25.609 --> 01:23:37.189
And the point is that, or the assumption is that these companies are going to use these long-term bonds to make big investments, big capital investments or whatever, to grow their business.

01:23:37.500 --> 01:23:40.029
This is obviously standards, nothing controversial about that.

01:23:40.689 --> 01:23:47.460
And after their business grows, obviously they make more profit more money and they can pay back the loans that were granted to them 10 years later.

01:23:48.159 --> 01:23:54.140
But the thing is, what happens if the economy is not healthy or if the loans were given in an unproductive manner?

01:23:55.210 --> 01:23:58.100
Then those profits are not being realized.

01:23:58.680 --> 01:24:01.619
And I'm not saying like this is some sort of a Ponzi scheme or something like that.

01:24:01.899 --> 01:24:04.420
A lot of times it just doesn't necessarily realize.

01:24:05.079 --> 01:24:10.010
You can be exuberant in the loans or the risk calculations weren't done properly.

01:24:11.390 --> 01:24:17.210
The company's still viable, but they don't have the cash to completely service their debt.

01:24:17.710 --> 01:24:24.729
So what happens is, well, banks are not cold hearted people, contrary to what a lot left-wing people would say.

01:24:24.510 --> 01:24:34.760
But they see this and say, okay, well the bones of your company are sound, we're looking at your Balance Sheets and your Income Statements, we see your financials are good.

01:24:34.979 --> 01:24:37.560
So what we're gonna do is we're gonna extend you more debt.

01:24:37.659 --> 01:24:41.800
So you basically take another loan out, which is used to pay off the original loan.

01:24:42.020 --> 01:24:47.590
And then now you have more credit, so you can go do more stuff and then you can expand your business.

01:24:47.850 --> 01:24:53.430
And this revolving line of credit, a lot of company, even in the United States and in Europe, this is just the standard thing.

01:24:53.500 --> 01:24:56.869
There's a revolving line of debt that you do.

01:24:57.130 --> 01:25:00.909
In fact, a lot of companies purposely take debt even when they don't need it.

01:25:01.289 --> 01:25:14.500
Google and Microsoft, you know, Amazon-- they're famous examples of this, because you get actually tax breaks from the interest payments from bank loans that you wouldn't get from just raising capital from your equity.

01:25:15.199 --> 01:25:29.890
So the extension of credit and the rolling of credit, it's a constant thing in the economy and raising interest rates means that 10 years ago, because of the economic prospect landscape was optimistic means the interest rates were lower.

01:25:30.270 --> 01:25:44.729
And if you're at this point where like, okay, your financials are good, but you don't have the free cash flow to service all your debt, getting a new loan-- that's now, all of a sudden, it has a higher interest rate, well now all of a sudden, yeah, your revolving line of credit-- now the cost of that has increased.

01:25:45.029 --> 01:25:50.239
Not because you're asking for more money, but because servicing that debt is now increased.

01:25:50.460 --> 01:25:56.880
So raising your interest rates, when your economy is based on a revolving line of credit is also damaging.

01:25:57.180 --> 01:26:05.760
And yes, again to the classical economists' credit, yes, you're going to absolutely slow down the economy, potentially slow down the, uh, inflation.

01:26:06.539 --> 01:26:11.680
But doing so in this particular case means the company goes under.

01:26:11.440 --> 01:26:17.039
This is exactly what happened with Lehman brothers back in 2008 or whatever it was.

01:26:17.300 --> 01:26:20.000
It wasn't that Lehman brothers was...

01:26:21.079 --> 01:26:25.470
I mean, sure they've done shady things, just like a lot of other banks, but that's besides the point.

01:26:25.729 --> 01:26:31.270
The point here is that the bones of their company were actually really sound.

01:26:31.869 --> 01:26:34.470
It's just that they had this liquidity squeeze.

01:26:34.470 --> 01:26:38.109
They didn't have the cash to be able to service whatever debts that they had.

01:26:38.110 --> 01:26:45.939
And they couldn't revolve the debt: banks wouldn't lend them new lines of credit to keep going, because they were over-leveraged on different things.

01:26:46.140 --> 01:26:54.819
And obviously there's tons of reports on this, but they famously went to the United States government to ask for a bailout, and George W.

01:26:54.819 --> 01:26:55.979
Bush said no.

01:26:56.399 --> 01:26:58.899
And of course they went under and they failed.

01:26:58.900 --> 01:27:00.739
But their assets didn't fail.

01:27:00.621 --> 01:27:12.850
And what happened was, like vultures to carrion, all the other big banks took all these amazing assets of Lehman Brothers and bought them pennies on the dollar and incorporated them, and improved their Balance Sheets.

01:27:12.909 --> 01:27:14.170
So it, it was good for them.

01:27:14.171 --> 01:27:22.250
It sucks for Lehman, but it was pretty good overall for the banking sector, because the underlying assets of Lehman Brothers were good.

01:27:22.279 --> 01:27:23.850
It's just, they were under liquidity squeeze.

01:27:25.060 --> 01:27:27.760
And that's kind of essentially what's happening in Turkey now.

01:27:28.189 --> 01:27:42.520
Well, not essentially, because there's other issues about the bones of the economy, not being good, which we'll get to, but when you have a liquidity squeeze, if you can't find debt, if you can't find people to lend you debt, then your company will go under.

01:27:42.979 --> 01:27:49.270
And in order to find debt, the riskier your company is the more interest you have to pay.

01:27:49.970 --> 01:28:04.949
And if the Central Bank increases the interest rate, well that means the floor, the starting position of that interest rate is going to go up, and is only going to further increase the interest load that you have to find to be able to service your debt.

01:28:05.239 --> 01:28:12.859
And of course, if it's too high, then you're gonna go under not because your company was bad, but it's just that you couldn't get money to pay for immediate needs.

01:28:13.829 --> 01:28:20.420
Again, in 2008, when a lot of these lines of credit were being extended, the Central Bank interest rate was below 20%.

01:28:21.000 --> 01:28:23.619
And normally like, who cares about what happened 10 years ago?

01:28:23.621 --> 01:28:28.289
Because most functioning, at least developed countries have a sound economy.

01:28:28.430 --> 01:28:32.649
So the prospects and health of the companies are going to expand and only get better.

01:28:32.989 --> 01:28:37.529
But if they don't, well, then what happened 10 years ago matters with these revolving line of credits.

01:28:37.680 --> 01:28:39.609
Because guess what happened in 2018?

01:28:39.909 --> 01:28:42.890
The central bank interest rate went above 20%.

01:28:43.590 --> 01:28:48.479
And that means the cost of revolving your debt, obviously it was higher.

01:28:48.619 --> 01:28:58.159
And if your company can't even service the principle or the original interest, a new loan, obviously being more, puts you under a greater financial burden.

01:28:58.859 --> 01:29:30.590
Now, another factor of this that we need to consider is that unlike countries like the United States, UK, Japan, where the credit that's being extended is in your home local currency to finance and facilitate the running of your ventures, the credit that was being extended to Turkish companies during this 2008 period of economic prosperity, that Erdogan on was ushering in, did not come from Turkey.

01:29:31.090 --> 01:29:40.829
It came from American and European lenders, which means that the debt that was being serviced was not a Turkish Lira, it was a foreign currency.

01:29:41.270 --> 01:29:43.739
Which exposes you to foreign currency risk.

01:29:43.890 --> 01:29:48.579
Because if you have a loan in lira and inflation happens, well, actually, hell that's freaking good.

01:29:48.770 --> 01:29:57.060
Because if the loan that you took out was for, let's say, a million liras, now a million liras today is now worth only, you know, a hundred thousand liras.

01:29:57.489 --> 01:29:59.739
Well, I'll make that deal every single day.

01:30:00.289 --> 01:30:00.899
Inflation.

01:30:01.600 --> 01:30:03.489
This is the whole point of the mortgages, right?

01:30:03.689 --> 01:30:15.489
Mortgages are an awesome thing, generally speaking, because, to take an example, when you take out a mortgage, you take a mortgage for the value of the house now, but you pay it off in 30 years.

01:30:15.949 --> 01:30:21.449
And the value of the mortgage, which is constant, 30 years from now is worth considerably less because of inflation.

01:30:22.350 --> 01:30:31.640
When you were paying, let's say a hundred thousand dollars in today's money, a hundred thousand dollars 30 years from now is not gonna be worth that much.

01:30:31.739 --> 01:30:33.439
So hell, you're actually making money.

01:30:33.899 --> 01:30:37.279
Add that on top of the fact that the value of the house presumably is going up.

01:30:38.000 --> 01:30:42.079
But you can see why housing is generally considered a good investment.

01:30:43.010 --> 01:30:48.789
But that only works because the value of the dollar has depreciated.

01:30:49.050 --> 01:31:04.420
You know, you have inflation and maybe healthy inflation, but inflation nonetheless, but the value of the dollar in the future is worth less than the value of the dollar today, and your loan being in dollars, that's what you pay, so you don't really care.

01:31:04.489 --> 01:31:05.579
It's, that's what it is.

01:31:06.439 --> 01:31:20.939
But when it's a foreign denominated debt, your inflation is actually a problem, because your loan, in case of Turkey, the loans that the Turkish companies took out were in dollars or euros.

01:31:21.560 --> 01:31:41.970
So, this is obviously wrong, but if the lira and the dollar is identical, and you take out a million dollar loan, okay, well, you've got to make sure you have a million lira and you can plan your financial forecast, that okay, 10 years from now, when I have to pay back this loan, I have to give these US debt collector a million dollars.

01:31:42.069 --> 01:31:44.640
So, okay, that's equivalent to a million lira, but I'm good.

01:31:44.640 --> 01:31:47.600
Just budget a million lira, because obviously I work in lira, right?

01:31:47.899 --> 01:31:48.880
So I'm good to go.

01:31:49.140 --> 01:31:56.560
But now with inflation, you still have to pay the million dollars, but now a million lira doesn't give you a million dollars.

01:31:57.350 --> 01:32:05.359
What you have now is you need 10 million lira to give you a million dollars, and you don't have that money because you didn't plan for that type of money.

01:32:05.899 --> 01:32:20.789
And what happens is, in the case of the Central Bank or in case of the central government of Turkey, their debt that they were being serviced on, which was in dollars and in euros, well they need to pay back these commitments, right?

01:32:21.010 --> 01:32:24.989
So the only way to do that was print more money, have more liras.

01:32:25.369 --> 01:32:40.380
And to an extreme case, this is what happened during the Weimar Republic in Germany is that all their debt that they had to pay to the Allied powers, especially France and Britain, were dominated in, in Franks and Sterling.

01:32:40.960 --> 01:32:48.699
The Germans had to pay this money to the French, reparations for World War I, but they weren't going to pay them in Deutsche Marks.

01:32:48.701 --> 01:32:50.100
They had to pay them in Franks.

01:32:50.800 --> 01:33:02.170
And at the same time, the French took control of the SAAR Land, which was the industrial Heartland of Germany, which means that Germany couldn't produce stuff, because the French controlled it.

01:33:02.310 --> 01:33:07.329
So they didn't have the means to produce stuff, to make their Deutsche Mark actually worth something.

01:33:07.710 --> 01:33:16.289
So the only way they could actually service the French Frank debt was to print more Deutsche Marks to keep up with inflation.

01:33:16.590 --> 01:33:24.039
But of course, when you print more Deutsche Marks, then the value of Deutsche Mark goes down, and then the case, like a never ending death spiral, you had hyperinflation.

01:33:25.199 --> 01:33:31.399
And that's all because they didn't have the productive capacity to finance the foreign denominated debt.

01:33:31.899 --> 01:33:52.029
And to a certain point, that's what you have in Turkey is that Turkey needs the service, the debts that are maturing, that they took back in 2008, 2010, 2012 timeframe that they just went on a debt binge, because everyone thought that Turkey was the darling developing nation.

01:33:52.489 --> 01:33:57.710
So foreign creditors were giving credit to Turkish companies and Turkish government left and right.

01:33:58.529 --> 01:34:03.619
Now the chickens have come home to roost and said, okay, well you need to pay back your debt.

01:34:03.880 --> 01:34:11.819
But because all that money wasn't put to good use, now you have inflation and they don't have the money to pay back.

01:34:12.239 --> 01:34:15.859
On the open market no one wants to buy the lira, because the Turkish economy is shit.

01:34:16.359 --> 01:34:19.699
So in order to get the dollars, they have to spend more liras obviously.

01:34:20.159 --> 01:34:24.010
And to do that from a foreign exchange standpoint, that's obviously inflation.

01:34:24.630 --> 01:34:26.850
And so what can the Central Bank do?

01:34:27.060 --> 01:34:37.569
Well now, if it takes 10 times more liras for a dollar, then you're going to print 10 times more lira to service those debts that you have to pay.

01:34:38.229 --> 01:34:42.760
And of course, by doing that, increasing the monetary supply, increasing the amount of liras.

01:34:43.149 --> 01:34:52.680
Classical theory, where in case of M equals P, well now more M means more P so the price of the dollar increases, which means you have to pay more.

01:34:52.699 --> 01:34:56.680
So we're starting to get to the point where the initial cases of a potential death spiral.

01:34:57.220 --> 01:35:13.800
You can clearly see this and that most of the debt debt that was being offered during this heyday of this Turkish Renaissance was almost to the day 10 years ago, which is considered the average lifetime of typical long-term debt structures.

01:35:14.220 --> 01:35:16.710
And this is not some sort of out of the blue thing that happened.

01:35:17.529 --> 01:35:27.949
The value of the lira, just from general inflation and just the general aspects of being a developing nation, there was inflation: lira was constantly losing value.

01:35:28.140 --> 01:35:31.829
It's just that it was considered acceptable and manageable.

01:35:32.130 --> 01:35:44.739
And assuming you have the bones of a healthy economy, well, the economic output that should produce should, in theory, counteract, and then some, the depreciation of your currency.

01:35:45.720 --> 01:36:00.329
But once the initial wave of these long-term debts began to mature in 2018, and you saw, yes, the lira was depreciating value, but it really skyrocketed around the 2018 timeframe.

01:36:00.331 --> 01:36:09.130
Which again, oh, coincidence or not, you can make that choice yourself, but that's when the first volume of these debt instruments came to mature.

01:36:10.229 --> 01:36:12.170
So how could have this been avoided?

01:36:12.909 --> 01:36:20.239
And that is, well, if you have foreign debt, presumably you're taking that debt to produce things that foreigners would want.

01:36:20.779 --> 01:36:33.560
So that if I'm a Turkish company and I'm taking a Euro debt, that's presumably to make an investment on something, to create something that I can sell back to the Europeans and they're gonna give me euros.

01:36:33.560 --> 01:36:41.229
And then with those euros, I don't have to worry about currency risk, and I can use those euros to pay back the debt that was granted to me.

01:36:41.409 --> 01:36:44.310
And this, again, this comes back to international trade.

01:36:44.930 --> 01:36:58.270
If you're gonna take foreign debt, you want to be able to make sure that you're exporting to that originating country or economic region in the case of the Euro, at least enough to service the debt of that currency denomination.

01:36:59.800 --> 01:37:14.939
So in the case of Turkey, you need to make sure that you're exporting enough stuff to United States and to Europe to acquire the US dollars and the euros to pay off US Dollar and Euro loans.

01:37:15.920 --> 01:37:17.899
But what do we know about Turkey with their trade?

01:37:17.930 --> 01:37:20.329
Well, they're not a net exporter.

01:37:21.010 --> 01:37:21.850
They're a net importer.

01:37:22.670 --> 01:37:39.210
So not only are they taking, not only is the Turkish government and Turkish companies taking foreign debt, but they're also trying to acquire foreign currency to buy the things in Europe and United States.

01:37:40.600 --> 01:37:46.720
It's not like they're building up a reserve or a reservoir of dollars and euros to pay back their loans.

01:37:47.340 --> 01:37:55.800
Any dollars in euros that they're picking up, they're immediately using to buy goods and services from the United States and Europe.

01:37:56.260 --> 01:37:58.079
And that's obviously not a good thing.

01:38:03.659 --> 01:38:22.189
And the reason why this has been such a poignant issue recently is that it's already bad enough that Turkey is a net importing nation, but you had this perfect storm of not only the maturation of these foreign denominate debts, but what happened in 2020?

01:38:22.590 --> 01:38:24.789
Well, the COVID pandemic hit, right?

01:38:24.791 --> 01:38:26.270
Well, there's a couple of things that happened.

01:38:26.890 --> 01:38:36.300
And specifically with Turkey, their biggest exports are heavy machinery, textile and tourism.

01:38:36.869 --> 01:38:37.739
Those are the big things.

01:38:38.359 --> 01:38:41.220
Now what has happened recently in the international scene?

01:38:41.810 --> 01:38:44.899
Well, you had the Trump's steel tariffs and what did that do?

01:38:44.930 --> 01:38:48.380
Well, that obviously put a downward pressure on Turkish imports of heavy machinery.

01:38:48.840 --> 01:38:54.859
Not only their steel products, but also just the general industrial machinery derived from those steel products.

01:38:55.050 --> 01:38:56.850
They were, aren't able to export those.

01:38:57.390 --> 01:38:58.609
It didn't just affect Turkey.

01:38:59.170 --> 01:39:03.050
A lot of the steel exports that Turkey does doesn't even go to United States.

01:39:03.369 --> 01:39:22.600
I think it's only like 5% or something, but those tariffs by the virtue of the United States economy, United States being the United States, it affected the global worldwide price of steel, which had cascading effects that ultimately reduced Turkish industrial exports based on steel.

01:39:23.310 --> 01:39:28.960
Then with textiles and tourism, obviously they dropped during the COVID pandemic.

01:39:29.920 --> 01:39:33.439
Well, obviously tourism went to a complete standstill.

01:39:34.220 --> 01:39:35.600
So you're not getting that.

01:39:36.020 --> 01:39:39.270
Now add to the fact just general economic growth.

01:39:39.859 --> 01:39:50.390
Usually if the sovereign country is financing its own debt with its own currency, it has reasonable power to keep the economic engine going.

01:39:51.170 --> 01:39:51.949
Say what you will...

01:39:52.430 --> 01:39:58.659
I mean, that's why, like the whole joke about Mussolini is like, well, at least they had trains running on time.

01:39:59.460 --> 01:40:09.619
Is that dictators may be bad from a political or a social standpoint, but there's nothing saying that dictators are bad for the economy.

01:40:09.880 --> 01:40:15.020
If anything, because they don't have to deal with internal politics, they theoretically could be very good for the economy.

01:40:15.560 --> 01:40:18.369
And Erdogan, yes was a strong man.

01:40:18.371 --> 01:40:21.729
It's not like foreign investors were stupid or naïve.

01:40:22.239 --> 01:40:39.159
They knew he was a strong man, but with the message that Erdogan was giving back during the early days of 2003 to 2008, timeframe was liberalization of the market and providing a lot of economic opportunity for foreign investors.

01:40:39.979 --> 01:40:49.680
And if you're an investor, would you rather get zero to 1% interest on your investment in the United States or would you rather get 20% in Turkey?

01:40:50.319 --> 01:40:59.239
Now, obviously there's a risk, because Turkey is, you know, riskier than the United States, but the risk premium that you're going to get, if it's large enough, you're like, yeah, why the hell not?

01:40:59.579 --> 01:41:12.359
And this was definitely the case last decade where economists all over the world were saying that Turkey is the darling developing nation and probably the safest developing nation to invest in.

01:41:12.529 --> 01:41:22.470
And so you're getting ridiculously high, in the perspective of a developed nation, you're getting ridiculously high returns from a practically un-risky country.

01:41:24.210 --> 01:41:25.789
Now, what did Turkey do with this?

01:41:26.369 --> 01:41:31.430
Did they actually take that foreign debt from those foreign investors and actually do something productive from it?

01:41:32.289 --> 01:41:35.060
You can argue yes or no, but most people would argue, no.

01:41:35.940 --> 01:41:39.100
All you have to look at is the GDP of Turkey over the past decade.

01:41:39.680 --> 01:42:00.489
But also notably during this decade, you had things like the Gezi Park protests, you had this supposed failed coup and a lot of other economic instability, him jailing his political rivals, which in Turkey's case, it's kind of like, Turkey's kinda like the opposite of Russia in that whereas Putin is in with the oligarchy.

01:42:01.000 --> 01:42:04.810
Well, yes, there's an oligarchy in Turkey, but they're against Erdogan.

01:42:05.710 --> 01:42:07.130
Or they were against Erdogan.

01:42:07.710 --> 01:42:22.960
So whereas Putin-- he works with is oligarchy to, if not improve the Russian people, at least improve the Russian Federation, Erdogan actually actively fought against the Turkish oligarchy and put a lot of them to prison and whatnot.

01:42:23.060 --> 01:42:26.319
And it was also if the oligarchy is in prison, well, there's not much...

01:42:26.659 --> 01:42:34.319
That's going to shake the confidence of foreign investors in the ability to extract financial returns from investments within Turkey.

01:42:34.920 --> 01:42:37.710
Again, you can have political instability in your country.

01:42:37.760 --> 01:42:50.149
Again, going back to that Mussolini joke or anecdote, as long as you're controlling the financial instruments of credit, because especially if you're the autocrat, you extend the credit based on your whim.

01:42:50.369 --> 01:43:03.699
But if other people, if a foreigners are doing it, if they perceive the investment to be too risky based on whatever, but in this case, because of political risk, well, that's a big problem.

01:43:04.319 --> 01:43:28.890
And if the whole basis of running your country is predicated on the perceived un-riskiness of the political climate of your country by foreign investors, well doing politically risky things like jailing opposition leaders and businessmen and having these coups and whatnot, doesn't exactly help invest their confidence.

01:43:29.310 --> 01:43:32.130
And there's nothing saying that they have to invest in Turkey.

01:43:32.610 --> 01:43:36.840
They'll take their money and their capital and invest in in another developing country.

01:43:37.300 --> 01:43:50.560
And of course, once they do that, we'll then not only do you have to increase your interest rates just from a general classical economics theory, but you'll also have to increase your interest rates to attract the foreign capital in, in the first place.

01:43:50.760 --> 01:43:59.880
And of course, increasing the interest rates to attract foreign capital that has gone to other countries that puts even a further burden on your society, on your citizens.

01:44:00.899 --> 01:44:09.720
And then of course on the other side of the coin is it's not just about the exports, but it's about the trade imbalance, if you will.

01:44:09.819 --> 01:44:12.149
Of the difference between exports and imports.

01:44:12.569 --> 01:44:25.350
And with Turkey, despite having economy, that's been mismanaged to the point of not producing real or stable or healthy growth, there has been a lot of economic activity, especially in agriculture and construction.

01:44:25.890 --> 01:44:28.069
But what do those agriculture instruction rely on?

01:44:28.630 --> 01:44:29.949
Well, that requires energy consumption.

01:44:29.551 --> 01:44:36.779
And if the price of energy is going up, not only with COVID, but just in general, Erdogan antagonizing of Russia.

01:44:37.579 --> 01:44:51.420
Well, Turkey is reliant on the Russian natural gas, not only from a general energy consumption standpoint, but most of the fertilizer that Turkey relies on for their agricultural sector comes from natural gas that Russia provides.

01:44:52.069 --> 01:45:06.689
So an increase in the prices of natural gas, or even a reduction of the flow of Russian natural gas, not only increases the cost of energy, but by the fact of reducing energy means that it reduces your economic output.

01:45:06.690 --> 01:45:13.840
Which means, again, another effect of not being able to service the debt that you have in foreign currencies, because you're not producing enough.

01:45:14.779 --> 01:45:37.590
But even from a more broader perspective, one of the reasons why Turkey, despite being a developing nation is almost paradoxically an importing one, a net importing nation is because traditionally Turkey has always had high inflation, which again, high inflation in itself is not necessarily bad if it's managed right.

01:45:37.591 --> 01:45:39.590
You just keep pumping in more money.

01:45:39.729 --> 01:45:43.909
And as long as people make more money than the inflation, it's good.

01:45:43.911 --> 01:45:45.350
It's not ideal, but it's manageable.

01:45:45.859 --> 01:45:46.390
It's okay.

01:45:46.930 --> 01:46:01.819
But the thing is what that causes from a psyche standpoint or zeitgeist, as Germans would say, is that the Turkish people as a whole, generally have low savings, because why would you save your money If inflation is persistently high?

01:46:02.539 --> 01:46:04.899
Whatever money you have now, you should immediately spend it.

01:46:05.079 --> 01:46:06.619
And this is the cultural thing.

01:46:06.880 --> 01:46:07.579
You go to Turkey.

01:46:07.960 --> 01:46:14.250
And then if you have a Turkish friend and you go to a restaurant, you know, one way to egg him on this is just that you you're gonna pay.

01:46:14.510 --> 01:46:19.050
And then of course like everyone on the table is like, no, I'll pay, no I'll pay, no, no I'll pay.

01:46:19.051 --> 01:46:20.369
It's a big, it's a big thing.

01:46:20.489 --> 01:46:22.409
And there's a big fight going on, who's going to pay.

01:46:22.829 --> 01:46:24.369
And then eventually someone does.

01:46:24.390 --> 01:46:34.880
But the point here is that in the culture of Turkey, is that wanting to pay for things or just not saving money, just the general part of tur or society.

01:46:35.529 --> 01:46:39.239
Conversely, for example, in Japan, it's the complete opposite, right?

01:46:39.329 --> 01:46:42.840
Japan has a chronic saving society.

01:46:42.841 --> 01:46:50.479
They constantly save money, which is one of the big factors in the deflationary troubles of Japan is that everyone is saving.

01:46:50.619 --> 01:46:52.319
So the economy is not moving along.

01:46:52.539 --> 01:47:02.000
You're getting all the deflation and, and with deflation, meaning the yen is constantly gaining value, which encourages the Japanese to save even more.

01:47:02.020 --> 01:47:08.279
And then you have a death spiral in Japan's case, but you have a spiral nevertheless in the opposite.

01:47:09.529 --> 01:47:14.590
So with low savings, if you have low savings, that means you have low investments, right?

01:47:14.591 --> 01:47:20.390
According to classical economic theory, which means that you're not increasing the productive capacity of your country.

01:47:20.899 --> 01:47:30.020
Well, if you're not improving the productive capacity of your country, but presumably living standards are increasing or your population is increasing, which in Turks definitely is the case.

01:47:30.079 --> 01:47:30.939
Big population boom.

01:47:31.359 --> 01:47:37.420
Turkey had a huge population boom in the past few decades, which means that Turkey needs more goods and services.

01:47:37.800 --> 01:47:50.090
But if there's no investments going on because of the lack of savings, then the only thing Turkey can do, or the Turkish people can do is increase their imports to gain those goods and services.

01:47:50.670 --> 01:47:55.729
So trade imbalance that you already have, that predisposes Turkey to importing..

01:47:56.079 --> 01:47:56.649
Just the..

01:47:57.079 --> 01:48:12.680
Because of the cultural or societal norms of not saving because of this ethereal spirit of inflation, it only exacerbates that trade imbalance, to make Turkey even more of a net importer.

01:48:12.720 --> 01:48:19.760
Which again, there's nothing wrong with that, provided that your economy can handle the importing.

01:48:19.779 --> 01:48:27.119
And in the case of foreign denominated debt, you can have enough exports to counteract that drain of currency.

01:48:28.350 --> 01:48:33.199
So yes, Erdogan is an autocrat, but he was also a populist.

01:48:33.201 --> 01:48:36.119
That's how he got into office in the first place.

01:48:36.699 --> 01:48:42.880
One of the things that he said was that the current political climate, or back then the current political climate was...

01:48:42.659 --> 01:48:45.079
It's essentially the same thing here in the West.

01:48:45.710 --> 01:48:48.680
It's essentially it's the right wing politics, but you know, whatever.

01:48:48.680 --> 01:48:50.359
That's not good or bad necessarily.

01:48:50.800 --> 01:49:02.229
To basically saying, in some cases rightfully so, or in a lot of cases rightfully so, the Turkish political elite were only servicing elite and the common man was being left on the wayside.

01:49:02.890 --> 01:49:15.100
So in this populous wave of support that Erdogan got, one of the things that he wanted to do was to improve the lifestyle of the average Turk citizen.

01:49:15.760 --> 01:49:18.300
So he need to make a lot of investments.

01:49:18.399 --> 01:49:29.020
And with all the economic liberalization policies that Erdogan introduced during his first couple of years back then as a prime minister, he attracted a lot of foreign investment.

01:49:29.380 --> 01:49:33.890
And of course, if you're trying to rapidly grow your foreign investment, you'll gladly take it.

01:49:33.890 --> 01:49:39.649
But of course, foreign investment does have a specific risk if it's not serviced properly.

01:49:40.590 --> 01:49:51.399
And with the perception of foreign investors, that Turkey was not only a safe country, but a model developing nation, well, of course it's going to be flooded with financial investments.

01:49:51.420 --> 01:49:57.000
And the more financial investments are being flooded, obviously the interest rates of those investments are going to be low.

01:49:57.260 --> 01:50:12.909
So essentially even though the risk premium of a supposed developing nation should be at a specific high level, the amount of foreign investment that was flooding the Turkey meant that it was actually cheaper than the quote market rates of a developing country.

01:50:13.449 --> 01:50:14.829
So why wouldn't you take it?

01:50:16.140 --> 01:50:16.430
Okay.

01:50:16.430 --> 01:50:24.029
Well, we just explained why classical theory doesn't apply here based on the, the Curtis LeMay effect.

01:50:24.810 --> 01:50:32.859
So you're probably thinking, okay, well, you know, let's close up the shop: we got it, Erdogan clearly is right, and he should lower interest rates.

01:50:33.020 --> 01:50:39.180
I mean, we just spent, I don't know how long, but we talked about all the underlying conditions, why he should be lowering the interest rate.

01:50:39.180 --> 01:50:40.100
It makes more sense...

01:50:39.820 --> 01:50:46.779
Well, actually, despite everything I just said, I agree with the classical economist.

01:50:46.840 --> 01:50:48.609
He should be raising the interest rates..

01:50:49.149 --> 01:50:51.569
And I'll tell you why in Part II.

01:50:51.949 --> 01:51:19.720
So stay tuned for the thrilling conclusion of this episode! If you would like to comment on this podcast or on the topics covered within it, or you'd like us to raise a new topic in our next episode, please feel free to leave us a message or a voicemail on www.codbsm.com.

01:51:21.140 --> 01:51:24.479
That's Charlie, Oscar, Delta, Bravo, Sierra, Mike, dot com.

01:51:24.890 --> 01:51:27.920
Thank you for listening and see you at the party, Richter!.