Bringing back economic serenity

Finally, the Central Bank has come to the rescue. True, there is a shortage of funds to rekindle investments. Again, it is no secret that net reserves are about minus USD 45bn. Also, it would take more than one step to convince households – let alone high net worth individuals, who would obviously behave defensively – that deposit small amounts to turn to lira assets. Monetary policy can’t achieve all goals at once if it stands alone. Yet the communication is as it should be, and market players expect deeds to follow suit. Head-on inflation has climbed to 15% and people generally believe it is much higher. A sequence of interest rate hikes are looming, beginning with 100-125 basis points this week. It was clearly crucial ahead of the Governor’s meeting that the right communication would matter a lot. It was every bit as right as communication goes. The stress on rampant inflation, for one thing, was the right thing to do because central banks’ mandates are licensed first and foremost to contain inflationary pressures. Slow reserve accumulation might indeed follow suit, if things go well.


While the much worn out word ‘reform’ doesn’t clearly underwrite any guarantee with respect to civil liberties, it is a lot easier to return to the norm in economic matters. The Bank is to return to normalcy, and that entails the following, at least: There will be one (policy) interest rate (the one-week repo rate); other rates, such as late liquidity, are to be used as they should be and not spread over the jurisdiction of the single policy rate. Inflation is the main focus, because for an inflation-targeting central bank, it should be so. While reserve accumulation and such are extremely important after having lost so much reserves, the Bank sees that as a process that ought to be entangled with the restoration of foreign investor confidence and the easing of dollarization domestically. The automatic mechanism that feeds into reserves through rediscount loans may not be enough, but it is surely a good contributor. Add to this the very likely drastic shrinking of the current account deficit all the way from USD 35-37bn this year to USD 9-11 next year, and
you come up with an extra feedback mechanism. Now, replacing within the span of a single year what the c. USD 130bn gross sold out – again in a single year, but eroding reserves is easy; replacing them is much harder – can’t be a realistic target. However, if the pandemic eases after the vaccination process is over – an optimistic assumption- by Q2 2021, and if the lira stabilizes due to high TRY rates and sound Central Bank
guidance – so inflation falls a bit, then come summer we may observe that accumulation indeed has become visible. I don’t think CAATSA and the EU sanctions that are supposedly in line with it will do any economic harm, if they remain contained as lenient measures – which they are. As such, they won’t change an iota for the dollar outlook, for instance. Then, with the passing of time, the Central Bank’s current stance might undo whatever harm that has been done – but only slowly.


The Fed is staying put. That said, its policy is already near-zero so in terms of interest rates there is no way to goes short of contouring somehow the zero interest rate lower bound. It could buy more assets, but it is staying put on that front also. Neither the scope nor the composition of Fed purchases have changed; they are to go at USD 120bn a month until “substantial further progress” is observed on the employment and inflation fronts. One reason could be the new, better economic outlook it conveys to the public. The Fed now sees 2020 GDP contraction at 2.4% as opposed to the previous estimate of 3.7%. The U.S. now looks tamer compared to a few months earlier. Actually, when the outbreak erupted in April globally, and during the summer, not only international financial institutions and other financial centers had flirted with the idea of a V-shaped recovery, but also – even though they would spread the gossip that V-shape was possible, they had predicted a deeper downturn – and a steeper upturn that could follow it. Now the overall impact looks better. That is so save the labor market (see below).

In the EU, however, facts are less impressive. This is all the more important for Turkey because the U.S. is far away, and Europe is our top export destination. Well, as a commentator wrote, “events march straight into the abyss of a service-led recession” in the EU. There, it isn’t just about setting the correct interest rate policy, and stepping back in order to watch what will happen next. That is of course so after huge fiscal packages are put in motion as well – something Turkey nicely omits. Even then, European decision makers will have to design a fine-grained labor market policy and carve in new regulations. The one thing in common with Turkey is that neither can afford to lie idle in the face of the alarming spectacle of the economy. Indeed, Christine Lagarde underlined that recovery “may not be linear, but rather unsteady, stopstart and contingent on the pace of vaccine roll-out.” This looks like many things: an out-of-equilibrium belief or a chaotic trajectory – as Keynes maintained back in 1936 vis-à-vis asset (financial markets) but not real sectors. This instability may feed into a feedback loop with the real sector in Europe, and this is what Lagarde warns about. She mentioned a firm exit multiplier – good concept – with a lot of adverse effects.

Everywhere the pandemic is feared, especially if it percolates a vicious cycle between the real economy and the financial one if it spreads further. That might set in as a new argument in the production function, a C factor that akin to labor, capital, and technological innovation, bears on output and employment for a long time to come. That might happen even after vaccines are globally implemented, and all the more so if people think they are insulated from the pandemic because there is a vaccine now. The pandemic is very dangerous and will continue to remain so even after that because vaccine is no final solution, although it is all there as a precautionary evice. Having said precautionary, if people resort to precautionary savings instead of spending in Europe, well, the stagnation could last much longer.


Clearly, the jobs outlook now looks precarious. My main hypothesis is that new forms of labor that were incoming anyway have now been accelerated due to the pandemic’s force majeure. There is no way capitalism can continue as before; this much was in fact obvious after 2008. Nevertheless, changes were delayed in as much as return on capital invested didn’t yet amortize itself. The reasons were more economic than technological. Now that Turkey’s real unemployment rate is nearing 27% – after being controlled for lower female participation – the outlook is indeed blurred further. A mapping of ‘new forms of employment’ across the EU had already pinpointed several trends that were active over the last two decades. For those who remember, the German-born French thinker André Gorz already signaled the radical shift in the very structure of the European working classes back in 1980. The employment form most often identified with novelty was the advent of robot use throughout back then. Now the new, or increasingly important jobs, are ICT-based mobile work, whereby employees or a self-employed person work from various locations outside the traditional workplace. Not only the factory as understood in the 1970s has lost its importance, but even the idea of a workplace, office, bank or what not, is giving way to a less place-bound image of work, even less constraining than traditional teleworking. The next two questions are: who or how many are to ‘return’ to (their previous, pre-pandemic) work? What will be the nature of (the new) ‘work’ anyway? Will ‘work’ simply stand there unchanged so previous – or new for that matter- employees come to re-occupy them?


There are risks but the outlook is brighter today. Yet there is the more crucial issue of shortage of funds to shore up employment and restore investments, and this issue takes more than a monetary policy return to normalcy. It actually requires funds.

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