2021: A brave new world?

WELL, that is the end, folks! We have finally come to the anti-climax and first, all positive expectations, and then all the calamity forecasts are borne out by events; they have become realities. The new era is not only characterized by lower interest rates, but also by lower growth throughout the global economy. It is in a sense the rebirth of the secular stagnation hypothesis. Inflation, growth and job formation have been so low in developed economies that they are now on the verge of a reset or new transitional dynamics are borne, especially in job markets throughout. Unless there are reversals in those trends – in the U.S. but add to this Europe as well starting from 2022 – the stagnation phase of the 2007-2009 crisis will be remade on a grand scale. Compared to 1929, we are no longer in 1937-38 so we may expect strengthening in economic activity within a year or so. Remember, in the U.S. data the 1939 Q2 print was the definite end of the 1929 Great Depression. On the contrary, we are possibly facing a brand new era. In all likelihood, this time around it won’t be easy to revert back to old trends. This may not be a global cycle only; the whole equilibrium dynamic might be replaced by a new stellar system.


Before the advent of a new era, let us state plainly the stylized facts about the Turkish economy once again. What about Turkey? External balance comes first. One, the current account (CA) does not determine the level of the nominal exchange rate. Two, growth implies current account deficit – to some extent. Three, the real exchange rate is useful and significant in any regression with the current account as a variable to be explained. However, the strong relationship between the current account and the real rate of exchange weakens to the point of fading away if other explanatory variables are included in the model. Binary relations are desultory more often than not and we should not take the coefficients generated by bivariate models too seriously. Also, the CA and the net errors and omissions item influence the exchange rate. But their coefficients easily lose significance when other variables are included in the regressions, i.e. interest rates. Four, oil prices and the energy bill were extremely important in the last 15 years in that they almost determined – except 2013, when even the non-energy component raised significantly exogenously the CA deficit. And that is the first pillar of the anti-climax, of which more below. After 2013, the energy constraint and high oil prices that cost a lot were gone because oil was the prime commodity of the 20th Century. We don’t know for sure, but it is unlikely that oil prices will rise fast in The current account deficit will shrink to less than half of what it was in 2020, especially if, come summer, tourism revenues increase somewhat.


Clearly the only way out of the impasse is to accumulate reserves again. The CBRT’s current stance is promising and I think it will stay on course at least in H1. Then, as we all know, the policy rate can be cut only bit by bit in a cautious fashion. Hopefully, the complete monetary policy reversal will help build credibility, and portfolio investments will pour in. A small dose of this happened in the past weeks. Although the real sectors aren’t yet convinced and asset substitution is hard to reverse so easily and so quickly, at least dollarization may come to a halt. After that we ought to rely on two factors: the effectiveness of the vaccine and a golden rule solution to disputes with the U.S. and Europe. Then, of course, domestic politics should also remain a matter of domestic expediency, and not a matter of international politics and vice versa. There are many ifs as one can see. On the other hand, there will be global structural change in the post-COVID world. It is already around the corner.


One of the graphics displayed herein depicts some landmarks perceived as leading indicators of systemic risks. If anything, after the “soft power” rhetoric of the late 1990s, which by the way was nothing but an artefact of PE in S&P500 between 1996 and 2000, itself caused by overseas investments to American stocks, political risks increased. And there were wars and civil wars, and proxy wars, and terror everywhere. Amidst lots of changes, politically, militarily – Russia is a force to be reckoned with again, and yes, China is coming up with giant steps, especially its navy – and economically, the old wisdom of the 1990s is definitely lost. The situation all too often resembles the last years of peace before 1914, and this is a suggestion frequently repeated in the last few years. Now it is compared to 1918-1920 because of the outbreak. However, bygones are bygones, and the past never repeats itself in the same vein. Still, on at least two accounts the political scene bears similarities with the distant past. First, Europe is laden with a renewed ascendency of radical – right-wing this time – movements. This will not go away easily. Second, in lieu of rivalry between European powers there is now a prolonged war of attrition between the U.S. and China. Add to this lots of ‘proxy wars’, Syria being the first and foremost case in point. ‘Proxy wars’ extend to relations with Iran, a die-hard theme of ‘cold war’ with Russia that can always re-emerge, sanctions, oil prices and all that. If war is not an option, it is only because primo, the enemy (of the West) as such is a bit disparate and therefore almost unknown and, secondo, military technology is frighteningly advanced and can easily get out of control. Technology also traces a similar trajectory, not in its essence but due to the fact that it grows by leaps and bounds, but the economic and wide-spread applications of it await maturity and/or need time so old capital invested amortizes itself. We shall see a totally different world in possibly just a decade or so. In the meantime, right-wing populisms will occupy the political landscape not only of the middle-of-the road countries, but also of the developed ones. Europe is a case in point, but so is perhaps the U.S. Given all these uncertainties, the dollar cannot remain the single anchor of the international financial system. There are at least digital monies backed by central banks in the making, if not Bitcoin itself.


However, there is a caveat, and the caveat is more than political. On a global scale, it is an epoch-making change that we should now be talking about. The loss of the world pillar, or the foundation on which the old world lies, might cause a great trouble for a couple of years until such time as transitional dynamics are exhausted and new parameters are fixed. Yes, it is COVID-19 that will bring forth the long-awaited change. It is an exogenous shock or factor that will become endogenous all too swiftly. As in the symbolic family of “rings” in the Nordic culture, the importance imputed to an outside object in which the talent of the age has been invested constitutes the core of the legend.


And yes, the change can also be political. The ring was an extremely important metaphor for die Jungkonservativen, from where a plethora of German nationalisms sprung and drove Hitler to power. I have reproduced the image in order to convey the message that the danger is all too big and that a seachange in each and every economic, political and financial mindset should follow. Not only the world pillar of the Washington Consensus – or neoliberalism, as it is sometimes labelled – has been lost forever, but also the time-honored political and cultural fabrics of Europe and the U.S. are disintegrateing also. There is something different that has been stirred up in the labs, scientific research, and all sorts of tendencies that look futuristic to some. Nevertheless, even Industry 5.0 suffices to give a hint as to the intricacies of a new era that is bound to come with the deep transformation of capitalism, remote workr, AI and all that.

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