AS INFLATION reached 14% in November, elements of covidonomics gathered a new meaning. Isn’t it odd that as economic activity weakens, demand for tourism-services-restaurants shrink, travel and all that collapses globally, productivity falls and supply chains are in a deadlock, and inflation goes up? Certainly awkward, but then no country has experienced such currency depreciation.At again c. 15%, the exchange rate pass-through has taken its toll, as anticipated. Yet we don’t know how inflation will be tamed because actually the lira didn’t gain much value, and certainly the pass-though is asymmetric. When the lira goes under, inflation soars, but it will take more time and much confidence to reroute inflation parameters to trend levels in the opposite case. I take it for granted that 13% year-end is in the cards, and anything short of a comprehensive economic and politico-legal package that would reset the agenda, the only way to contain inflationary pressure would be a drastic fall in domestic demand. Nevertheless, this looks like a jump from the frying pan into the fire. With so many job losses, whichever way the economy goes, there will be a price to pay in 2021. And the price needs be paid up front, i.e. in Q1.


In the very beginning, around March-April 2020, the issue appeared thus: the problem was so big and so deep was the uncertainty surrounding the horizon of the crisis that even the Fed was in danger of not swiftly restoring confidence despite fast and draconian moves that were unimaginable a couple of months earlier. Why is that so? Uncertainty becomes entrenched in such times because this is a supply shock and because we are talking about a pandemic that spreads very quickly. So, the simple statistics of epidemics is one such reason. Furthermore, the number of confirmed cases depended on how many tests you ran. So, if you refrained from running enough tests, you would report fewer cases initially, which didn’t necessarily reflect the truth. Also, any country could resort to random sampling of some sort if the outbreak was already widespread, and report reasonable estimates within the day. That the real number of infected is perhaps n-fold relative to official reports would follow suit. However, because people can do the simple math, diversion is only a self-defeating strategy.

What were the reasons for keeping people at bay, for not reporting the full truth? In the beginning, most people assumed that the spread would be quick, but it would peak within a couple of months or so. Well, notwithstanding the fact that a falling rate of spread doesn’t imply the outbreak is over, this visual outlook may not be true at all now. Nobody could tell the epidemic curve was single-peaked or unimodal, and if it wasn’t that the second peak would be less severe than the first. Actually it is more severe. Modelling has already begun to incorporate multimodality, as traffic models suggest. That was applied ex post to the 1918 influenza pandemic and to asthma modelling. Because nobody knew what the curve would be like, prudent statesmen had already assumed that worst-case scenarios might apply as well, and Angela Merkel is a case in point, whereas Trump isn’t. So he lost.

One further note: the death toll isn’t exponential because in order to be exponential, deaths (Dt) at time should always be greater than deaths (Dt-1) at time t-1. Not only is this not obviously so, but also it is true that the spread curve isn’t possibly exponential either after a certain – hopefully nearing – threshold. Otherwise, disaster would be imminent.


Because – but not only – Trump rejected a complete lockdown, the policy debates focused on lockdowns alone. In Turkey also a 2-3 week lockdown had been proposed as early as May, but it didn’t happen. Now that we are back to square one, and the pandemic is back with a vengeance, should we lock down or not? Admittedly it may not be that simple, but delaying the inevitable necessarily hurts, and that’s another matter also. Because the Pfizer-BioNTech vaccine is hard to procure in large numbers, the first wave will make use of the China vaccine, which has not been approved yet globally. Furthermore, it is now a matter of time because the rate of contagion and the mortality rate are among the highest in the world. It may be a lot worse than envisioned even after the case numbers have been adjusted somewhat, especially if we compare cases to populations. Actually the U.S. has about 320 million people, which roughly makes four times Turkey’s population. Cases should be compared accordingly. Also the shape of the curve matters.


Geopolitical events may have lasting effects. But they also have no long-lasting effects. Consider the killing of Qasim Soleimani. What happened to Brent? A few days upsurge only; then what? The price of Brent oil is now lower than before. This is why global financial markets don’t care one iota about risks, bad news, and hearsay. Perhaps they are right. Perhaps they aren’t. But in the short run, global markets are obviously right. And arkets are ‘capricious things’. I don’t think the killing of the Iranian nuclear scientist Fahrizade will have a long-lasting effect because it won’t change Biden’s main focus. Clearly, Biden will opt for another round of tit-for-tat, although couched in more polite terms, with China, following thus the Obama
Doctrine of 2014. This means a constructive approach toward the Middle East, and that includes Iran as well as Turkey. No CAATSA appears on the horizon, and falling short of a serious retaliation targeting Israel, Iran may be re-invited to talks. As Turkey prepares to declare reforms on December 10, the day the European Leaders Summit opens, I also tend to think Europe will go easy on Turkey in the short run. This is a total policy response as Biden suggested. Both the U.S. and Europe will try to come to terms with Turkey first without any sanctions.


Consider the following argument: “Contrary to the theory prevalent on the left that liberals say what they say because they are hirelings of the Koch brothers (while the leftists are not hirelings of George Soros), liberal ideology was and is not a reflex of the relations of production, or a necessary outcome of some self-interested social contract, or speech bought for pay. As Antonio Gramsci argued, ideologies seldom are, the vulgar Marxists to the contrary. Ethical ideas underlie ideologies, independent to a considerable degree from formal institutions or incentives to self-interest or the relations of production. Ideas and ideologies matter on their own.” (McCloskey, “Fukuyama Was Correct: Liberalism Is the Telos of History”, Journal of Contextual Economics – Schmollers Jahrbuch). It is perhaps true that culture and values determine behavior, and institutions only to the extent they shape values and determine culture. Nevertheless, Italians may not be that religious and Irishmen may not be that poor or ignorant as 200 years ago, but the world at large other than European offsprings – and China possibly – isn’t imbued with values of free will, entrepreneurship, an innovative spirit, and suchlike. In fact, quite the contrary; even Europe and the U.S. aren’t immune to rightwing populisms, and a return to the golden age of classical liberalism looks like an elusive target. So, what would any reform target? The letter of the law or its spirit; implementation or design: which comes first?


New funds, new ways of insurance, new rules (such as job protection), new trends (such as working on-line even after the outbreak dies off), and perhaps direct injection – “helicopter money” – will and should be called for. The working mode of the system might change a bit after this – which didn’t truly happen after 2008, on which more anon. Risk – especially correlated risk – underlies the financial market failures that plague smallholder agriculture and retail. Correlated risk also undermines SME financing more often than not. Risk mitigation mechanisms (insurance) can potentially alter this financial market reality. It is not just a matter of stabilizing consumption with insurance, but also a matter of inducing financial market deepening and underwriting risk-taking needed for technological change and productive asset accumulation. It is definitely not about opening credit channels for a short period at low rates – artificially, a device that is (was) conducive to both FX and interest rate risks further after the first phase is over. We are there now. Either fıll confidence will be restored somehow, or another source of funding should come to the rescue, or both. Whatever will happen should happen fast because time is of the essence.

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