Is Turkey Benefiting From an Attack of the (Visible) Bond Vigilantes?
In addition to claiming that the bond vigilants are invisible (i.e. nonexistent), Paul Krugman has also argued that even if investors around the world suddenly lost confidence in Treasury bonds (because of fears over Uncle Sam’s profligacy), it would actually be good for the economy. For Krugman’s argument to apply, a country needs to (a) have excess capacity, (b) have its own currency, and (c) have debts largely denominated in that currency. These conditions apply to the US and Japan, which is why Krugman quite clearly said that these two economies would benefit if investors suddenly lost confidence in their bonds.
In this context, what are we to say of the situation in Turkey, where the central bank just jacked up interest rates quite sharply to stem the depreciation of its currency? Well, it issues its own currency (the Turkish lira), and its unemployment rate hit 9.9% in December 2013, slightly higher than the annual average rate (according to IMF) of 9.8% in 2011. (It had fallen in 2012.) Meanwhile, just eyeballing the chart from this forex website, the lira fell against the USD by easily 10 percent over that period (it depends when you start), not counting the rapid plunge this month.
Does the Turkish government / central bank have a lot of foreign-denominated liabilities? I have no idea. But at the very least, it looks like we now have to add Turkey to the list of countries (such as Greece) where Krugman et al. will need to explain why, “It can’t happen here.”
In case anyone is curious, here is a screenshot of Turkish consumer price inflation rates and unemployment rates, from 2001 to 2012, from the IMF:
What does the above data mean? Who knows? I can definitely tell you an Austrian story where the above data are just what we’d expect to see, and Krugman can definitely tell you a Keynesian story that does the same thing.
Would Krugman say Turkey has excess capacity?
I truly don’t know, DJ. Although if he tried to argue that their excessive social programs yield 9% natural rate of unemployment, that might be…awkward.
I don’t know anything about Turkey, but just eyeballing the chart and seeing unemployment stay basically stagnant from 2002 to 2008, I’d venture to say today’s unemployment is somewhere around the natural rate. It jumped up in 2009 during the recession, and it went back down to the rate of the previous years. So there you go. It wouldn’t meet the criteria. That would be my guess to Krugman’s response. .
And i venture to say that they seem to have a quite high “natural” annual inflation rate as well. Obviously the CBRT (Central Bank of the Republic of Turkey) isn’t as good as the Fed in fighting inflation.
“I’d venture to say today’s unemployment is somewhere around the natural rate”
See folks this is the problem with trying to make conclusions of economic truths based on past observations. In order for the claim “10% unemployment is close to the natural rate of unemployment, on the basis that we have observed unemployment to be high for a number of years in the past” to be true, we have to assume a free market in labor in Turkey.
But what if there has been some “unnatural” activity going on in Turkey the last 10 years that has kept the unemployment rate above the “natural” rate, year in and year out? You can’t know this by looking at the unemployment rate alone.
I know you’re just shooting from the hip DJ, on a blog of all places, so no big deal, but my point is what you are doing is what PhD economists do, they just add more bells and whistles to their argument to make it seem like that approach is a valid one.
I’m well aware of that, Freedom. I was shooting from the hip, but the inflation rate also told the story
At 45% inflation, unemployment rate was at 10%. At 25%, inflation was at 10%. And then for the next 5 following years of steady 9%ish inflation, which theoretically is supposed to keep business cycles tamed, the unemployment rate continued to stay unchanged. This gave me a clue that monetary policy was a non factor. Since the only unnatural activity that keeps unemployment above the natural rate is monetary policy by definition and it looks to me like monetary policy was a non factor, I came to the conclusion that Turkey was at its natural rate.
“…steady 9%ish inflation, which theoretically is supposed to keep business cycles tamed….”
Actually that theory is not right. It is not low/modest price inflation that keep business cycles tamed, but rather, a low/modest difference between prevailing interest rates affected by the central bank, and free market interest rates, and, as a corrollary, a low/modest difference between credit expansion, and credit backed by voluntary savings.
The 1920s for example was a period of low/modest price inflation, but a bubble was still generated. Higher real productivity in general does not tame business cycles, and yet high productivity keeps prices lower. So it’s a bad idea to infer from prices whether or not there is strong business cycle generating activity taking place.
Real GDP matches potential GDP when the money supplied matches money demanded, when the market interest rate matches the natural interest rate, or when desired saving matches desired investment. Whatever way you want to phrase, they’re all the same.
Since we can’t actually target those vague theoretical variables, Keynesian believes believe a steady/ stable inflation rate approximately accomplishes the above goals for various reasons. (note: I did not say anything about low/modest inflation. I said steady inflation. Turkey obviously does not have low inflation. A high 9% target should work similarly to a low 0% target) In the case of market monetarists, stable nominal GDP does a superior job than stable inflation. Any deviations from the target causes fluctuation in output until inflatoin/NGDP or expectations adjust accordingly.
Anyway this is all besides the point. I’m just saying that given Krugman’s framework (whether you disagree with it or not), Turkey is not necessarily the gotcha Murphy was hoping it was.
“Real GDP matches potential GDP when the money supplied matches money demanded, when the market interest rate matches the natural interest rate, or when desired saving matches desired investment. Whatever way you want to phrase, they’re all the same.”
All of those are different.
“Since we can’t actually target those vague theoretical variables, Keynesian believes believe a steady/ stable inflation rate approximately accomplishes the above goals for various reasons.”
There should not be such targeting. Approximately accomplishes is not accomplishes, and what you would like to perceive as small differences, is sufficient to causing very large, painful corrections.
“(note: I did not say anything about low/modest inflation. I said steady inflation.”
No difference.
Steady, low…the problem is the focus on prices.
“Turkey obviously does not have low inflation. A high 9% target should work similarly to a low 0% target) In the case of market monetarists, stable nominal GDP does a superior job than stable inflation. Any deviations from the target causes fluctuation in output until inflatoin/NGDP or expectations adjust accordingly.”
Adjustments in accordance with market forces cannot take place if the market is prevented from functioning.
LOL at a 9% natural rate of unemployment. Some countries just suck. Sorry Turkey it’s the truth.
PK would argue that turkey has a conservative governement, so….
They are blaming the problems in Turkey on the corruption probe.
There you go, the USA never investigates corruption, so the US economy never reacts to the implications of a corruption probe. How about that?
This is empirical evidence that corruption boosts economies and that truth hampers economies.
Just so long as we keep raising GDP.
Anyhow, corruption is just a free market in favours. Illegality never stops trade for long.
Bob,
Turkey’s inflation numbers kind of put the U.S. situation into perspective. If the Turkish economy can grow substantially against a background of inflation like that, it makes you ask “what do you have to do to make capitalism not deliver”? Turkey basically had their industrial revolution in the 2000s with 10% unemployment and 10% inflation.
For the rate of growth, it seems like it’s the trajectory of policy that matters. The absolute level of policy-how free people are-puts a ceiling on potential wealth.
This data really seems to show me that monetary policy isn’t that important. Just like the market economy could deal with the crash of 1920, an economy can grow against a background of high inflation provided policy is moving in the right direction. Something tells me that contrary to Scott Sumner, it’s supply side policy rather than monetary policy that is keeping the current recession going just like bad policy created and prolonged the Depression.
The 1920 crash was caused by monetary policy. Look at page 231 of Milton Friedman’s “A Monetary History of the United States.”
Run for your life joe. Don’t look back!
Austrians would agree with what joe said.
Bob,
I’ve read you article on Hayek about competing fiat currencies. I read Hayek’s pamphlet and found his initial proposal absolutely fascinating. You introduce competition into the production of money simply by getting the government to allow payments in a couple different currencies. For example, if Turkish people could pay their taxes in Euros, Dollars, or Lira, the Turkish central bank would not be able to run high inflation. Could you write an article at some point about how such a system might work and what impact competing government issued fiat currencies might have. It seems to me that competing government fiat currencies is a simple, relatively easy, but very dramatic step towards liberty.
Since Keynesian know a priori that inflation never causes unemployment, not in a million years, regardless of what the data looks like, it means they will present their “scientific” theory using data other than inflation.
Quite the contrary actually, the mere existence of inflation is proof positive that the economy is operating optimally with full employment. Seriously! Krugman said the following:
See what he did there? Low inflation is proof of idle resources, therefore high inflation must be equally proof of all resources nicely humming away. Therefore we can be sure there is no unemployment in Turkey. Not just sure, but Krugman sure, which is even better.
And linkey…
http://www.nytimes.com/2014/01/17/opinion/krugman-scandal-in-france.html
-Yes, that’s Krugman’s view.
-Nope, that’s not Krugman’s view. “If D, then R” does not equal “if not D, then not R”. Note that I am typically far from a Krugman defender, but in this case, you clearly misconstrued his views.
i -> L
does not imply
~i -> ~L
Tel is right. According to old-school Keynesianism, you cannot get inflation if there is “slack,” idle-resources, or an output gap. Increasing demand, whether by printing money or government spending, first employs the unused resources and then starts to raise prices by causing overheating, bottlenecks, and/or wage-price spirals.
That’s why the 1970s made the Keynesian Konsensus look so damn bad. They had to change their views (creating New Keynesianism) and happily some economists rejected their viewpoints altogether. Unfortunately, New Keynesianism is still the dominant paradigm even among self-described libertarians like Bernanke.
It’s clear that Krugman still holds the view that inflation will stay under control as long as the U.S. economy isn’t operating at full steam ahead. However, he can no longer say that inflation is impossible in a depressed economy. The fact that we have an awful economy with 2% inflation should be enough to make him scratch his head.
Pathetic.
Stagflation is certainly possible after a long period if tine when an economy develops a tolerance to higher and higher levels of inflation. No Keynesian or monetarist denies that.(try again, MF) I would guess bob Murphy, that the Turkish central bank is trying a Paul volcker moment. It has nothing to do with bond vigilantes.
“Pathetic.”
Oh you’re not that bad Eddy boy. You’re just an angry person who lets his emotions cloud his reason.
“Stagflation is certainly possible after a long period if tine when an economy develops a tolerance to higher and higher levels of inflation. No Keynesian or monetarist denies that.(try again, MF)”
Keynesian tell me stagflation was a chimera. They try to explain away the 1970s as something other than.
Check out the “Scandal in France” link above where Krugman does literally deny that stagflation can exist. “For proof, one need only look at inflation,”
Note that, only knowledge of inflation is sufficient proof, no other information is required.
Stagflation did force a lot of the Keynesians to modify their beliefs. If you read Paul Samuelson, it is very clear that his models do not allow for the possibility of stagflation and he is at a loss to explain it when it happened. The originai Keynesianism of the 40s and 50s became New Keynesianism to deal with stagflation. Their resilience to an event that showed their model to be very flawed is actually quite remarkable.
I should start calling myself a “New Austrian” or “Post Austrian”, that way I can also claim (though not necessarily believe) plausible deniability for every criticism levied against Austrianism, without abandoning the “essence” of Austrianism.
Oh wait, LK tells me that adding an “s” to Mises’ arguments on the natural interest rate means I have to become Keynesian.
Geesh, I guess not enough lower income people were paying for mal-investment liquidation and government waste.
QE anti-taper redirect here we come.
http://finance.yahoo.com/news/obama-unveils-savings-proposal-workers-110000134.html
Unemployment rate in Turkey has never been below 8%.
http://www.tradingeconomics.com/turkey/unemployment-rate
“Unemployment Rate in Turkey averaged 10.76 Percent from 2005 until 2013, reaching an all time high of 16.10 Percent in February of 2009 and a record low of 8 Percent in June of 2012.”
That is hilarious. Are you actually saying “never” and then referring to a chart that goes all the way back to the ancient times of 2005 AD ?
…
BTW I found something a little more ancient:
http://www.indexmundi.com/g/g.aspx?c=tu&v=74
This points to extremely bad labor market policies and not some “natural” rate of unemployment. It’s not like a greater percent of Turkish people just aren’t willing to work. In fact, in a wealthier country like America, you would expect more people to be unwilling to work unless they found the perfect job because their survival isn’t at stake and hence a higher natural rate of unemployment.