E5: Bombing the Turkish Economy - Part 1 - Come On, Don't Bullshit Me!

Episode Transcript
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Henri (00:00):
Today, we are going to kick off part one of what is
going to be a two-part episodewhere we'll talk about the
current economic crisis that'sgoing on in Turkey and the
controversy surroundingpresident Erdoğan's comments
about his interest ratepolicies.
In today's part we're gonna setthe stage by delving into how
competing economic theoriesattempt to explain the situation

(00:22):
that's going on in Turkey.
And then in part two, we'llexplore what happens when these
economic theories clash with thereality of the situation on the
ground.
To start off, though, let'slisten to a succinct summary
provided by Deutche Welle andtheir reporting on the current
crisis.
Let's have a listen.

DW Reporter (00:40):
Double-digit inflation and a crashing
currency are turning the incomeand savings of millions of Turks
to dust.
The Lira has lost 50% of itsvalue against the dollar since
the beginning of the year, morethan almost any other currency.
Discontent is growing in recentweeks.

(01:02):
Demonstrators took to thestreets in Istanbul and Ankara,
they called for the governmentto resign.
Many lay the blame for Turkey'scurrency crisis on president
Recep Tayyip Erdoğan.
Every time he pressures thecountry's central bank and calls
for interest rate cuts, the Liraplummets even further.

(01:23):
Economists warn, inflation isspiraling out of control.
And Turkish consumers are theones who literally have to pay
the price, but president Erdoğanhold the unconventional view
that lower interest rates fightinflation.
And despite the Lira crashing,shows no sign of changing his
position.

President Tayyip Erdogan i (01:46):
What we are doing might be
politically very risky, but it'sthe right plan for our country
and our nation.

Henri (02:00):
Come on.
Don't Bullshit Me! Yeah, theeconomy slowed down, but you
know, it's like telling someone,oh, you need to lose weight, but
rather than then going onexercise and dieting, they chop
off their legs.

(02:20):
It's like, okay.
Yeah, you reduced weight, butnow there are bigger problems
there.
Welcome to"Come On, Don'tBullshit Me!", where we peel
away the messaging of talkingheads to get to the crux of
today's issues.

(02:45):
So one of the things that theyteach us at the academy during
military strategic studies isthe flow from the academic Ivory
Tower, if you will, of theory,the doctrine, to the strategy,
all the way down to tactics, andmore specifically, how each of
them evolves along that chain ofevents.

(03:08):
And there're countless examplesof this throughout military
history.
All the way from Sun Tzu tomodern day.
But one of the big stories thatstands out, particularly at the
Air Force Academy is obviouslyof an Air Force general.
And that was general CurtisLemay, the father of the modern
bomber force.

(03:29):
And most people today know himas the father of the Berlin
airlift, but there is a lot moreto him than that in the Air
Force.
He's considered the father ofSAC, the father of Strategic Air
Command, which was essentiallythe bomber mafia.
There there's an expression inthe Air Force: fighter pilots
make movies, but bombers makehistory.
And while World War II was goingon, the theory of warfare, which

(03:53):
was being constantly testedbecause, you know, we're in the
middle of a world, war was abouthow bombers should go and run
their campaigns, right?
So this is where the concept ofstrategic bombing came in,
especially after the battle ofBritain because the Germans, the
Luftwaffe, pretty much destroyedall of the docks and the war

(04:15):
making capability of the Britsafter France capitulated.
And according to some reports,there was a candid interviews of
Churchill after the fact.
But basically they were saying,okay, Britain was pretty much
ready to capitulate andsurrender to Germany right then
and there, because the Luftwaffewas so effective in just

(04:35):
completely decimating Britishwar making capability.
But then during that time, theBritish did a cursory bombing
mission to Germany, and Hitlerwas obviously pissed off about,
how dare the British come andreach out, and touch us, and
bomb Germany.
So he switched his focus.
He ordered the Luftwaffe to,instead of bombing all the

(04:57):
factories and the docks-- theBritish war capability, he said,
we're gonna bomb London, thecity, and bomb the civilians for
their insulins of how dare theybomb the, the Fatherland, or
whatever.
Which actually allowed theBritish war making capability to
recover.
Because the Germans temporarilystopped bombing their factories,

(05:19):
they were able to recover theirwar making capability and
continue to fight.
And obviously they didn'tsurrender.
And then eventually, obviouslythe United States came in and
tipped the tide.
And while this was going on,they're like, okay, well now
that the Germans decimatedLondon, well now it's payback
time.
So the Brits were like, okay, wegotta go bomb Germans, but we

(05:41):
need to figure out how we'regonna do this.
Because obviously it's a, it's adifficult thing to do.
And they tried to do...
To bomb specific factories ballbearing plants, because that's
the rules of warfare.
What the hell are ball bearings,right?
But those are the keycomponents, and bombing the ball
bearing pants basically groundedthe German war fighting machine

(06:04):
to a halt, because ball bearingswere essential components in
motors and engines and whatnot.
So, but the Brits realized thattheir bombs were ineffective,
right?
Because this was obviouslybefore the days of the GPS.
So they were pretty much relianton flying over a target,
dropping the ball and thenletting Isaac Newton's law of

(06:25):
gravity do the work.
And it wasn't really thateffective, especially because
they were trying to be high upbecause of the flat cannons and
whatnot were a big threat to thebombers.
Flat cannons are the A AAanti-aircraft guns.
So to avoid or to minimize thedamage from anti-aircraft guns,

(06:45):
you would try to fly above theflat cannons so that you can get
to the German factories.
But of course being that high upt hen it's obviously it's harder
to hit your targets.
So that really didn't work.
So eventually they decided,okay, well we're gonna do
nighttime bombing runs, becauseat night it would be, figured,

(07:05):
it would be harder to hit thebombers and, we're gonna be like
lows to the ground, andbasically instead of targeting
factories, we're gonna put likea box if you will, over a city
or a town and just bomb the shitout of it.
Right?
That's why most German citiesare pretty modern architecture,

(07:26):
because all in the nice ancientarchitecture with the wooden
façade, the old like, you know,from like Hofbräuhaus comics,
you know, those, those don'treally exist.
Except for actually there'sinteresting...
Another side story.
There was this one town right onthe Swiss border.
I forget the name of the Germantown.
But obviously Germany, they'relike once they realized this

(07:49):
nighttime bombing was going on,they pretty much said, okay,
everyone has to shut theirlights off, right.
But this one German town thatwas like right on the Swiss
border, they actually, lefttheir lights on.
And then the Allies thought, oh,well this town has their lights
on, so clearly they're notGermany.
And like it's right on Swissborder so, oh this must still be
part of Switzerland.

(08:10):
So they skipped that.
And I forget the name of thetown, but if you go there now
today, you can actually see howGermany looked like, at least
German towns look like pre-Worldwar II, because they were saved,
because they successfullyoutsmarted the Allies by saying,
oh yeah, we're totallySwitzerland.
But anyway, so the Brits werebasically, okay, we're gonna

(08:30):
make a square instead of bombingindividual factories and, based
on the lighting of the towns,dump all your bombers into that
square of the village and bombthe shit out of it.
Like who cares if it's a factoryor a civilian target.
This is obviously the datesbefore Geneva conventions.
So the Brits basically leveledentire towns.
So the Brits would bomb atnight.

Fast forward to 1942 (08:52):
America has entered the war.
And now there's this big thingwhere while the Europeans were
fighting, the US was obviouslyneutral and we were doing our
own thing.
Like testing and R&D.
So we developed this thing,called the Norden bombsight.
It was this really superaccurate bombsight where you can

(09:12):
dial in your altitude and thewind speed.
And then on the bombing rangesin the United States, even
though you're like really highup, ridiculously high up based
on what would be considered theflat cannon ceiling.
And even despite flying abovethat ceiling with the Norden
bombsight, you were like superaccurate with the delivery of

(09:33):
the bombs.
So the Brits were like, Hey US,we're glad that you're part of
the war effort, but we've beenbombing the Germans, we've got
like two years under our belt.
We've got a lot of experience.
So this is what we're doing,we're bombing at night.
And we recommend you do the samething.
And the US being the cockyAmericans that we are, we said,
nah, screw it, we've got thisthing called Norden bombsight.

(09:55):
The Brits were like, what is it?
Oh, that's classified.
That's how, like, even though weshared things like Enigma code,
stuff like that, amongst eachother and breaking cryptograms
and whatnot, the Nordenbombsight was so top secret,
that we didn't even share itwith the Brits, the technology
with the Brits.
But we were like, yeah, we havethis Norden bombsight, it's
super accurate and we're notgonna do nighttime bombing.

(10:17):
We're gonna do daytime highaltitude precision bombing.
And we can do that because wehave this bombsight.
And there's this big argumentback and forth between British
Air power theorists and theAmerican Air power theories on
what's a more effective bombingstrategy: low altitude nighttime
or high altitude daytimeprecision bombing.

(10:40):
Long story short, Nordenbombsight was shit, it didn't
work.
And we didn't really do thatmuch damage.
Because, turns out American,quote,"experience", was bombing
ranges out in Arizona orwhatever, desert conditions, no
one's attacking you, nothing.
So,, we quickly realizedthat...

(11:01):
Well we actually, we didn'tquickly realize, we didn't
realize shit.
Well, actually we realized it,but we didn't accept it,
basically saying, no-no, highaltitude daytime precision
bombing-- that's the way to dothings, and we're gonna do it.
And then, you know, post mortum,we figured out that, oh, we
actually weren't as effective aswe thought we were, because the
testing conditions on a bombingrange are completely different

(11:24):
than actual war over one of themost powerful modern empires of
human civilization.
Anyway, the other funny thingwas that during this whole
debate of whether nighttime ordaytime was more effective,
rather than one side convincingthe other of when and how to

(11:45):
actually bomb, because bothparties couldn't come to an
agreement, each side, eachparty, decided to do their own
thing.

So we basically took turns (11:53):
like the Americans would bomb during
the day and then the Brits wouldbomb at night.
And then the daytime would comeand the Americans would keep
going on and on.
So the Germans never actuallygot a chance to breathe, because
because of our own infighting,we were like basically
constantly bombing them aroundthe clock.
Kind of like that.

(12:14):
Anyway, other than this being aninteresting story, we took these
lessons...
Well, actually, they weren'treally lessons, because as far
as we, the Americans, wereconcerned, daytime precision
bombing was totally the bestthing and this Norden bombsight
was the greatest thing sincesliced bread.
So we're gonna continue doingthis and we're gonna upgrade our

(12:35):
B-17s, the flying fortress,which was the main bombing
aircraft.
And you remember the movie,"Memphis Belle"?
The plane that they werefighting in the"Memphis Belle"--
that's the B-17.
But anyway, so the new aircraftthat they were building was
B-29, which was the superfortress.
And that one was this upgradedairplane, like the Enola Gay--

(12:58):
the bomber that dropped atomicbomb, that was a B-29 as well.
But it was this super fancyaircraft where everything was
computerized, computerized firecontrol system.
So rather than having 10 peoplelike in the"Memphis Belle"-- a
crew of 10-- essentially oneperson could control multiple
guns on the bomber, on theaircraft.

(13:21):
And the armor was up-armored toa point, where it said, okay,
neither the anti-aircraft, northe German fighters would be
able to fire on it.
So it was gonna be even moreeffective than that.
And obviously it was going to bebigger and larger, and more
capable.
So you can even put more bombson it, and what have you.
So, all around, this was apinnacle of American aviation

(13:42):
technology-- the B-29.
But by the time we got to beable to field it, well, the
Germans already essentiallysurrendered, or at least there
were close to surrendering.
So there was not really no needfor the B-29.
So all that effort was for not.
But obviously the Pacific warwas still going on.
So essentially all those assetswere moved over to the Pacific

(14:04):
and were used against theJapanese.
And this is where Curtis LeMay,this really came about his
genius, because basicallyeveryone, at least on the

American side, were saying (14:13):
yeah , it's high altitude precision
bombing, we've already verifiedit.
Even though it was completely,you know, not true, but as far
as they were concerned at thetime, yeah, high altitude
daylight precision bombing wasthe way to go, and that's what
we're gonna continue doing.
Until Curtis leMay came in andhe was like, uh, wait, wait a
second, I don't think we shoulddo this.

(14:34):
There's something to what theBritish were doing.
And what he did was rather thanjust listening to the theory,
and this is what's important, helooked at what the actual
situation was on the ground,because...
And this is why, and this is thewhole point of the military MSS
-- the Military StrategicStudies class at the Academy:
it's not just knowing thetheory.

(14:55):
You have to understand why thetheory came about.
And in business schools theysay, like, all theories or all
models are, are lies, but someof them are useful.
So he basically looked at thisand said, okay, why are we doing
a high altitude precisionbombing in Germany?

Well, because (15:11):
one, we wanted to get above the ceiling of the
flat cannons; and then two, weobviously, we got our Norden
bombsight and so we can do aprecision bombing there.
But more importantly, the Germanwar fighting capabilities were
pinpointed in these factories,right?

(15:32):
So that was the point to dohigh-altitude bombing.
But in Japan...
Obviously we didn't do reallystrategic bombing in Japan for a
long time, because our bombersphysically couldn't reach the
Japanese Homeland.
That's where in the middle ofChina, we had the bomber base,
in Chengdu.
But obviously, because back thenJapan controlled pretty much the

(15:54):
entire coastline of China, evenany forces that we
pre-positioned out in China werestill really far away because
the Asian content isridiculously huge.
But this is where we had theisland hopping campaign where
rather than fighting theJapanese, we just basically
bypassed them until we got to apoint where we conquered a
couple of islands that werewithin bombing range of Japan.

(16:17):
And that's when, when we couldunleash on bombers and do
massive damage.
It's kinda like if you rememberin"The Last of Mohicans" where
the British and the French werefighting, and then the English
were like, oh, we're gonna losedoesn't matter.
And Daniel Day-Lewis was like,what are you talking about?
And he's like, well, it's only amatter at a time: as soon as
they get their artillery withinthe range of our Fort, it's

(16:37):
pretty much game over.
So they try to sue for peace andthey left and a whole bunch of
other stuff happened, andawesome theme song, but
whatever.

Jack Winthrop, "The Last of (16:49):
May I inquired after the situation,
Sir, given that I have seen theFrench engineers from the bridge
above?

Colonel Munro, "The Last of (16:54):
The situation is his guns are bigger
than mine.
That he is more of them.
They keep our heads down whilehis troops take 30 yard of
trench a day when those trenchesare 200 yards from the Fort and
within range, you'll bring inthese 15 inch waters, lob,
explosive rounds over our wallsand pound dust to dust.

Jack Winthrop, "The Last of (17:10):
Aye .

Henri (17:27):
So once we got our bombers in range, Curtis LeMay,
who was in charge of the 8th AirForce and responsible for this
bombing of the mainland, helooked at it and said: okay,
well, first off with the jetstream, and basically Japan on
virtue being an island, Japanwas almost always cloudy.
It wasn't clear skies like inGermany.

(17:49):
So going a high altitudenecessitated going above the
cloud line, which meansobviously you can't really see
what you're bombing at.
So, that's one big issue.
But he also noticed that theJapanese war making machine, if
you will, wasn't concentrated infactories like with Germans, but
actually they farmed it out,because it was a total

(18:10):
mobilization of the population.
Basically the entire population,including the cities and towns,
were also used for war fighting.
So bombing specific targets forprecision bombing strike wasn't
as effective in Japan as itwould've been in Germany,
because the Japanese weren't inspecific factors or whatnot,

(18:32):
they would be at home or intheir little town areas, doing
whatever it was that needed tobe done for the war effort.
So the entire cities werecontributing to the war effort.
So precision bombing reallydidn't make sense.
And the other thing was, unlikein Germany where most of the
buildings were stone or metalwork, it was all wood and paper,

(18:54):
right.
So it was highly susceptible tofire.
So Curtis LeMay said, okay, youknow what?
Even though daylight precisionbombing 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 dothat, because it doesn't make

(19:15):
sense.
Because Japan is not Germany,and the conditions in Japan do
not apply to the conditions inGermany.
So we've got to change thetheory.
The theory was right forGermany, but when you apply it
to Japan-- for a different area-- it doesn't work.
So what he said was, okay, we'regonna do nighttime low altitude
fire bombing.
And that's where you had thewhole fire bombing of Tokyo and
a whole bunch of other cities.

(19:37):
And of course it ultimatelyculminated with the atomic bomb,
but that's a separate story,which is obviously immaterial to
Curtis LeMay's decisions.
Actually, before this, his wholebig genius, if you will, was
still, while he was a commanderof the 8th Air Force back in
Germany, because his wholething...

(20:00):
The fighters normally wouldaccompany the bombers.
Also basically when the bomberswould roll in through to where
they were gonna go bomb, becauseit was high altitude, the German
radar see them, right?
Because of the curvature of theearth, it's much easier to see
something up higher altitudethan it is to see something
close to the horizon.
So there was plenty of warning.

(20:21):
And because we were going highaltitude, we'd have our fighter
escorts.
And when the Luftwaffe wouldcome and try to shoot down the
bombers, the fighters wouldfight, and you have all those
zillion different World War II.
Films like that scene, thatfamous scene from Millennium
Falcon in"Star Wars", you know,the original"New Hope" where

(20:44):
they're fighting the TIEfighters.
And like Luke finally shootsdown one of the TIE fighters, he
is like, a h, I got one! And Han S olo i s like, u h, don't
get cocky kid, right?
You know,'cause there's more.

Luke Skywalker in "Star War (20:55):
Got it.
I got him,

Han Solo in "Star Wars (20:57):
A
Don't get cocky.

Princess Leia in "Star (21:01):
There's still two more of them out
there.

Henri (21:04):
That all was inspiration from all those old World War II
movies, because that's kind oflike how it was basically: you
had these guys just like Han andLuke in their little separate
shooting laser pods.
You had like 10 guys on a B-17,on the bomber.
Most of them, they would've beenin their different little gun
pods, shooting at the fightersthat were flying around.

(21:27):
And Germans would try to shootdown the bombers.
And then the fighters would tryto protect the bombers and yadi
yadi yada.
And obviously if all thefighters were destroyed, or if
they ran out of fuel orwhatever, they had to leave,
obviously.
Then the bombers would beexposed and the German fighters
could pick off and destroy thebombers.
Right?
That was the whole thing.

(21:48):
But then LeMay, what he did,what he decided was, okay, we're
not gonna have the fightersescort our bombers.
What we're going to do, I'mgonna send all my fighters ahead
of the bombers.
Like, you know, an hour, a halfhour ahead of them.
And then the Luftwaffe, they'regonna be alerted, because they
see all that on a radar, allthese, allied aircraft.

(22:09):
So they're gonna send all theirfighters up.
And even if our fighters aren'teffective, because they're like
half hour to an hour ahead ofthe bombers,'cause bombers are
in air, right, they're justbehind, they're just behind the
fighters; the they're gonna dotheir fighting and everything
like that.
Hopefully our fighters willbasically destroy the fighters.
But even if they don't, theGerman fighters will run out of
fuel and they're gonna have tobe forced to land.

(22:30):
So by the time the bombersactually come on station,
there's not gonna be any Germanfighters there.
We either killed and shot themall down, or they had to RTB--
Return to Base.
So, and that was the thing.
And then, okay, I shouldn't belike completely praising him on
this.
Because part of this was becausewith the invention of the P-51
and Mustang, which was the brandnew aircraft that allowed him to

(22:54):
do this tactic.
But still the fact that he evencame up with this tactic and
said, basically, I'm gonna leaveall my bombers exposed, which
was back then was unthinkable,because bombers are your most
important asset.
He said, no, I'm gonna leavethem completely exposed, but I'm
gonna send this fighterscreening ahead of them to
basically bait the Luftwaffe.
It was kind of ingenious at thetime.

(23:15):
Now it makes sense.
But back then, obviously it wasa super genius thing.
So he already proved his geniusin Germany.
So when he came to Japan, he wasalready primed with credibility
of successfully challengingassumptions, underpinning
doctrine or theory, or whatever.
So I spent all this time talkingabout how this amazing new
aircraft B-29, that was superup-armored and got all these

(23:36):
fancy control systems and couldcarry all these bombs and
whatnot.
Curtis LeMay was like, well, Isee all that fancy armor that we

have (23:44):
we're stripping all that out.
Which all the fighter, all theairmen were like, uh, are you
serious?
You're gonna get rid of all ofour armor?
But Curtis LeMay, his philosophywas like, okay, we need to end
this war, the Japanese aren'tgonna submit willingly.
So we need to do as much damageas we can to shorten the war.
Right?
That was basically the theory ofalmost every single general

(24:07):
during that time, becauseJapanese famously wouldn't
surrender.
So the only way we can reallyget them to capitulate is just
do maximum carnage, because in aweird mess up way, that's
actually gonna save the mostlives, if we do the most damage.
So he said, okay, obviously wecan only carry a certain amount
of bombs on the B-29 because ofthe takeoff weight.

(24:30):
But if we remove all the armor,or the unnecessary armor, we can
put more bombs on.
And obviously the airmen werelike, you can't take all our
armor.
And he was like, no you're gonnado that, because we need more
bombs.
But to counteract, we're gonnafly at night.
Because the Japanese werefamously known to be not good at
fighting at night.

(24:50):
Like their anti-aircraft andtheir fighters, their airmen--
they just weren't effective atnight.
So we're gonna go at night.
And we're not going to haveadvantage of the bombsight, but
in order to counteract that,we're gonna fly at a low
altitude.
And that was another reason whyyou'd want to do low altitude:
it was in order to get up to thecruise ceiling of, I think it

(25:11):
was like 30,000 feet that takesa lot of gas, right?
To get all the way up to stationof like 30,000 feet high, drop
the bombs, and then obviouslyyou come back.
But getting up to that highaltitude takes up a ridiculous
amount of fuel.
So if you just go low altitude,well, then you don't need that
much fuel.

Which means two things (25:29):
you can put more bombs on your aircraft,
or you can have the same amountof aircraft, but you can fly it
from further back.
And when you're talking aboutthe Pacific theater being
islands, you don't have thatmany places to fly from.
So the range extension is a hugething.
And he did this, even though allthe theories and everything that
was beaten into his head, fromthe academics to application and

(25:53):
even the public or institutionalpressure of the army Air Force
were saying, yeah, high altitudedaylight precision bombing is
the way to go.
He said, no, conditions aredifferent.
This is the way it is in thePacific theater.
This is what we're going to do.
And rather than having all theseconventional bombs that were
effective against modernearthworks-- the metal and the

(26:17):
brick of Germany-- they'd loadup with fire bombs and napalm,
and phosphorus, or a whole bunchof things that were basically
incendiary bombs that would justbasically not do so much
physical damage, but most of thedamage would come from the fire
damage.
And of course, knowing that theJapanese buildings were
basically wood-based, wood andpaper based, you knew that that

(26:39):
would be more effective thanjust conventional anti metal
bombs.
And sure enough, it worked.
To devastating effects.
Obviously a lot of people todaytalk about the atrocities of the
US committed against theJapanese, when looking at the
fire bombing that happenedthere.
And also fire bombing Dresden.

(26:59):
Some would even argue that theatomic bombs that we dropped
were less destructive than thefire bombing that was done on
Tokyo and Dresden.
But the fact that we even havethis debate just shows you how
effective the fire bombingcampaign was.
That all came about becauseLeMay went against the

(27:19):
conventional theory, becauseconventional theory was based on
different set of circumstances.
And he realized that, okay, inthis new battlefield, we have to
redo our assumptions, based onthe conditions of the
battlefield.
And I won't say"long storyshort", so long story
long, this is a big part of theMSS studies at the academy:

(27:42):
talking about not only how Airtheory, Air Power theory came
about, but also how we have torecognize not just the theory,
but understand the assumptionsbehind every theory, so that we
can make our own assumptions andupdate the theories based on the
conditions of the battlefield.
Because every battlefield isdifferent.
There's that whole famous sayingthat generals are always

(28:05):
training to fight the last war.
'Cause the whatever war we'refighting is gonna be presumably
different than the last war.
But because the only thing thatwe know is the last war,
everyone trains for the lastwar, even though that's not
necessarily effective.
So that's Curtis LeMay.
What does it have to do withtoday?
I am finally gettinginto it.

(28:35):
So the main point of this is toaddress the comments about
what's going on in Turkey withthe lira depreciation and the
inflation, and economic troublesthat Turkey is going through
right now.
Where it's pretty much almostuniversally stated that Erdogan,
the president of Turkey, isbeing an idiot and he is

(28:59):
constantly lowering the interestrates and that's what's causing
all these problems.
And if we just do what theconventional economics theory
states, which is raise interestrates to stop inflation, then
everything will be back tonormal.
Because according toconventional economics, if you
have inflation, your economy isrunning too hot, so you have too
much money chasing too few goods-- that's the famous phrase.

So what you wanna do is (29:22):
the Central bank of Turkey, it needs
to raise interest rates.
And if it raises interest rates,well then what are people going
to do?
Well with interest rates raisedthat means, the cost of
borrowing is going to beexpensive.
Which means people that wouldnormally spend money would not
spend money, because buyingthings is gonna be more

(29:42):
expensive, because the interestrate on loans is going to be
expensive.
And Because it's more expensiveto borrow, they're gonna borrow
less, right?
And borrowing presumably wouldbe to spend it into the economy.
So because they're gonna beborrowing less, they're gonna be
spending less.
Right?
And also the other side of thecoin for raising interest rates
means are gonna be paying youmore money for saving in your

(30:04):
savings account, whichencourages savings.
So not only are you not spendingmoney in the economy, because
it's too expensive to spend themoney, but you're also going to
save that money, because thebanks are going to pay you more
money.
Or I should say, because thebanks are going to pay you more
money, it is more advantageousfor you to keep that money in
the bank and not in the economy,which further cools down the

(30:25):
economy.
And that means since there'sless money chasing the same
amount of goods, well theninflation will drop and then
you're saved, right?
That's pretty much what anyonein high school or first year
College economics class wouldtell you.
This is like standard.
I'm not saying anything shockingor controversial here.
And that's actually why everyoneis basically calling Erdogan an

(30:47):
idiot, because any high schoolor a College economics undergrad
student is going to tell you, ifyou have a high inflation, raise
your interest rates, everythingis good.
So that's the thing.
And of course Erdogan is like,no, I'm gonna lower the interest
rates'cause interest rates arebad, and I know better, and if

(31:08):
you lower the interest rates,that's going to bring Turkey
back to prominence.
And there's a lot of theoriesout there, why he's thinking
that.
All the way from the crazythings from, okay, he's just
going in his old age, he'sbecoming senile, or that okay,
well this guy, he's not asecularist politician.
The whole thing about Turkey, orshould I say the Republic of

(31:31):
Turkey, you know, post 1923, isthat it came out of the ashes of
the Ottoman Empire.
And the founder of Turkey--Mustafa Kemal Atatürk-- said,
okay, we're going to be asecular nation, because that's
the only way to bring Turkeyfrom the backwards history of
the Ottoman Empire days andremove religion as an influence

(31:53):
in politics or within the state.
And he was educated inSwitzerland and also in France.
So like code Napoleon Lalaïcité.
You know, la laïcité isdifferent in America: in America
we have freedom of religion,whereas in France or La laïcité
is freedom from religion.

So that was his whole big thing: it's not just religion or (32:09):
undefined
freedom of religion is notenough.
We have to have freedom fromreligion.
So completely divorce religionfrom the state.
Anyway, we can devote a wholepodcast on the ascent of
Erdogan, but essentially as faras Westerners are concerned,

(32:30):
they considered him a moderateIslamist.
Which, and I can get into futurereasons why, that's an oxymoron
in itself.
But the point is, Erdogan, thecurrent president of Turkey, is
an Islamist, right?
He's big into religion.
He's like what George Bush wasto Christianity.

(32:53):
So Erdogan, being a moderateIslamist, or just plain old
Islamist, a lot of his theory ofgovernance comes from his
theories on religion.
Specifically, his theories onIslamic religion.
And one of the things that'ssaid in the Quran is the
outlawing of interest rate, ofusury, right?

(33:15):
Usury is forbidden or its haram.
It's a taboo in Islam.
So Quran forbids charginginterest.
It forbids usury.
It famously says, Allah permitstrade, but he does not permit
interest, and charging interestis the way of the Satan, and

(33:37):
whoever charges interest willburn forever in the fires of
hell.
And thing is what you'resupposed to do is, you're not
supposed to take interest frompeople, because that's consuming
people's wealth unjustly.
But instead you're supposed todo is you're supposed to provide
zakat.
You're supposed to becharitable, right?
Because zakat is one of the fivepillars of Islam.

(33:58):
And its actually really furthercodified, if you will, after the
death of the prophet Muhammad,during the reign of Abu Bakr.
Actually a lot of people say,oh, who's the most winningest
general in all human history?
And people like talk about, ohwell Napoleon, he was amazing,
or Genghis Khan, or like, youknow, Alexander the Great.

(34:19):
But actually Abu Bakr, who wasthe first caliph, or the
successor to the prophetMuhammad after his death.
And this is actually the kind ofthe genesis, if you will, of the
split between Sunni and Shia,for those who don't know, is
that after the prophet Muhammaddied, there was no clear line of

(34:40):
succession, especially becausehe didn't have a male heir.
So it's kind of like"Game ofThrones"-ish.
Now I will get nasty comments,because of comparing religion to
"Game of Thrones".
Anyway, the two main successorsto the prophet were Abu Bakr,
his father-in-law, and Ali whowas his son-in-law and
eventually Ali became a caliph.

(35:02):
The fourth caliph, but there's awhole bunch of things which
would require us to go into ahistory podcast at this point.
But long story short is that,who was going to be the
successor, whether it was gonnabe Abu Bakr or Ali, was
basically the initial cause ofthe schism, the split, which

(35:22):
between Sunni and Shia Islam.
But irrespective of all that thefact remains Abu Bakr became the
successor to Muhammad.
And he started going on thismassive campaign of conquering,
I wouldn't say the known Arabworld, but pretty damn near, at
least the entire Arabianpeninsula and a bunch of other

(35:43):
places.
And famously he didn't lose asingle war.
So when a lot of people say, oh,who's the most winningest

general (35:49):
Genghis Khan or Alexander the Great, or who have
you?
Well actually it should be clearcut case that Abu Bakr is
probably the greatest or mostwinningest general in all of
human history.
And during all these wars of AbuBakr, he basically said, okay,
one of the pillars of Islam iszakat, where you have to give
2.5% of your income of yourwealth to Allah, right?

(36:14):
And because he was the caliph,and it was a theocracy, that was
essentially the tax or thecharity that you would give to
the State.
Because the State was speakingdirectly on behalf of Allah.
So from an economic standpoint,without getting too much into
the religion, that's whatbasically financed the Empire,
right?
And it still stays to this day.

(36:34):
One of the things that Muslimsdo or they're supposed to do,
who provide zakat.
As Christians would call it,they're supposed to give tithe
to their local mosque orwhoever.
And compare that to Christians,who are supposed to technically
give 10%.
Maybe that's a higherpercentage, but because hardly
anyone does that, from anabsolute standpoint, it's

(36:54):
considerably less.
So the obvious question wouldbe: well, if interest is
forbidden, then how do all theseArab theocracies or Arab
religious countries, how do theyhave a banking?
How do they have a financialsystem, if they can't charge
interest?
Well, they get around that bybasically giving, quote,

(37:15):
"interest free" loans, but theyget a stake in the enterprise,
that's asking the loan.
Which, wink-wink, nudge-nudge,is the amount that corresponds
to the interest that they wouldget, had they been a Christian,
Jewish, secular whateverfinancial institution.
And nowadays, if you go to Dubaior Riyad-- a lot of these places

(37:37):
where they're trying to bring alot of FinTech startups, a lot
of the big FinTech startups inthe Arab world is about how to
do Sharia compliant FinTech.
Because most FinTech apps areall about how to charge
interest, right?
That's how you make money.
So this is a way you can stillmake money as a FinTech startup,

(37:57):
but you do it in a way thatSharia compliant, where
technically you're not charginginterest.
So it's all, it's all halal,it's not haram.
Right?
But anyway, long story short,this shapes Erdogan's, view.
But because Turkey is obviouslya secular country, or at least
it's supposed to be, it'sinstitutions, especially it's

(38:18):
banking and economic sector,obviously interest is being
charged.
But Erdogan detests interest.
And if he could, he woulderadicate it.
But there's institutionalinertia history there that he
can't fully get rid of.
But in his worldview, he'sconstantly trying to lower the
interest rate, because it'sharam to him in his eyes.

(38:39):
That's the story that mostpeople will give you on that, on
why he refuses to raise theinterest rates.
Even though every classicaleconomist under the sun will

tell you (38:49):
obviously just raise interest rates and this thing
will all be over.
But the thing is, is thisactually true?
And one of the things I want todo with this podcast as we go
forward, is mix and matchdifferent things.
Whether it's politics, socialissues, geopolitical issues,
international diplomacy,economics, military warfare,

(39:13):
obviously, but constantly do arotation, so it doesn't really
get stale.
But we're going to revisit a lotof the things.
And one of the things we'regoing to revisit, well,
especially when we haveepisodes, focusing on economics,
is about the flaws of classicaleconomics.
And here I'm going to initiallysay, come on, don't bullshit me!

(39:36):
You know, Erdogan isbullshitting us with this lower
interest rate.
But I'm going to pause here andsay, is he really bullshitting
us?
Because is the classical theorytrue that raising interest rates
reduces inflation?
And I'm going to try to take themindset of Curtis LeMay: all

(39:59):
institutional and historicalinertia tells you to do a high
altitude precision bombing,right?
This is the way when Germany isthe battlefield, where all
military theories are tested,whether they're bullshit or not,
it becomes readily apparent.
Now you are Curtis LeMay andyou're saying, okay, this is
what everyone's telling me.
Obviously, this is whathistory's telling me.

(40:20):
This is what my rational brainis telling me.
This is what to do.
But I'm in a different area now,should I still be doing this?
And that's what I want to talkabout here is that classical
economics, for the reasons thatwe stated it's quite evident
clear cut.
It totally makes sense.
Raise interest rates, whichmeans it discourages spending

(40:40):
and encourages savings.
And obviously that shoulddecrease inflation.
That's not controversial, but weneed to understand the theories
and assumptions that underpinthat chain of thought and see if
that actually applies to Turkey,just like LeMay did with Japan.
because the theories assumptionsin Germany did not necessarily

(41:01):
apply to Japan.
The assumption from classicaleconomics comes from...
One of the big underpinnings ofclassical economics is the

quantitative theory of money (41:19):
MV = PQ.
Which is the amount of money youhave-- the M, times the velocity
of money(V), how fast itexchanges hands, equals the
price level(P) times thequantity of goods that are in an
economy(Q).
And of course on average, allthings being equal, V and Q are

(41:39):
constant.
So all that's left really is Mand P.
So if you increase M, if youincrease the amount of money,
your prices go up, right?
And that's kind of like whatinflation is, right?
Inflation is too much moneychasing too few goods.
That's the whole thing.
But the thing there, andprobably you've already guessed
by now, is the V and the Q arenot actually constant in real

(42:03):
life.
It makes good for economics 101and for neat little theories,
because the math is prettystraightforward.
But that assumption of classicaleconomics implies that the
quantity of goods can'tincrease, which in macro
economic standpoint means thatyou have full employment.

(42:25):
Your labor force is completelybeing used to produce goods.
In classical economics we liketo talk about comparative
advantage.
Or they talk about, oh, you'reon island and you have bananas
and oranges.
And your buddy's on anotherisland, and he has bananas and
oranges.
Your island is bigger than hisisland, so you have potentially

(42:45):
more trees than his island,where he doesn't have enough
space for enough trees.
But the thing is, his climate isbetter for oranges, and your
climate is better for bananas.
So even though you can make moreoranges than him, you let him
completely focus on doingoranges and you completely focus
on bananas.

(43:06):
And comparative advantage statesthat even though you're not
doing the thing that you'reobviously better at than him,
because he's doing it from arelative stand point, he's
completely focusing on that, theamount of bananas and orange is
total between the two of youactually increases.
That's the whole point ofcomparative advantage.
And comparative advantageintroduces, the concept that

(43:27):
trade is good.
Free trades is good, because it,it improves the real welfare if
you will, of all citizens,right?
But again, the assumption herein that very basic example is
that you're using your entireisland for bananas and he's
using his entire island fororanges.
So there's no room to increasethe capacity.

(43:50):
And that's not a bad assumption,right?
Actually, that's what we wannastrive to, because if we have
all this potential, we wannarealize all the potential
because then we become richer,right?
So again, the fundamentalassumptions behind classical
economics is that you're usingall your resources, which makes
ideas like comparative advantagemake sense.

(44:11):
And again, that's a nice thingto have.
'Cause why wouldn't you want torealize all the potential of
your land, right?
Of your society.
And if we're going back to theislands example, why settle for
growing four trees, if yourisland can support six trees,
right?
Grow six trees to produce themaximum amount of produce,'cause
everyone becomes richer forthat.

(44:33):
The land can support it,obviously do it.
So the underpinning behindclassical economics is that you
can't increase your quantity ofgoods, because you're using the
maximum amount of goodsavailable.
It's a zero sum game, which iswhy comparative advantage works.
Is that for every orange Iproduce, I can't produce X

(44:53):
amount of bananas.
So rather than waste myresources on oranges, let my
friend, whose island is betterat producing oranges, let them
use it because zero sum game,I'm losing that land for
potential banana production.
Because with that land where Ican only grow one orange tree, I
can grow two banana trees,right?

(45:14):
That's comparative advantage.
But the thing is, again, usingall your resources, while again,
that's a very noble utopianconcept of classical economics,
frankly, that's not true in thereal world.
Because as much as we like it,we're not using all of our
resources.
I mean, frankly, using all ourresource would be disastrous,
because there's no slack.
Not to mention economicconservation and all those other

(45:37):
random things there.
But just even if it was possiblein some like Ayn Rand paradise,
where everything is being usedby Acme Inc.
We're not that case.
And you can easily point tothis, because the mere fact that
we have unemployment or evenunderemployment means there are
people not doing stuff, whichmeans that's resources not being

(45:57):
used, labor not being used.
Things are not being produced.
And this is where classicaleconomics breaks down.
I'm not trying to say classicaleconomics 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, whereclassical economics is the

(46:18):
reality and we're using all thethings that God has given us, if
you will, and we're not wastinganything.
And we're producing the maxamount of wealth for our
society, for ourselves and forour citizens.
But it's just that we're notthere.
And we have to deal not withwhat we want, but as Donald
Rumsfeld, may he rest in peace,would say, you don't fight with

(46:39):
the army you want, you fightwith the army you have.
So we can't run economics basedon theories that we want or that
sound nice.
We have to run economics basedon situations on the ground.
Just like LeMay with Japan.
And the point here is thatunemployment is an issue.
It's wasted resources from asociological liberal peacenik

(47:02):
standpoint it's bad, becauseobviously people don't have
money and they're poor andeverything like that.
But from a pure cold calculatedeconomic standpoint, it's also
bad because you're not fullyutilizing your resources, which
means your Q is not maximum.
Your Q is not constant.
So in that classical economicsequation of exchange, where the

(47:25):
Q-- the quantity of goods, goodsand services, is not constant.
It can move up and down.
It can drop, which means moreunemployment, or it can rise,
which means less unemployment,right, and more stuff is being
used.
And we'll have other podcastsabout this too, but there's also
a lot of things, like why cryptocoins are bullshit.

(47:47):
I'm not talking about blockchain-- there might be some use for
blockchain.
But the actual cryptocurrencies,or even this whole abolishing
the Fed, this libertarianparadise of we're just gonna
abolish the fed and go back tothe gold standard-- they're all
nice concepts in theory.
Well obviously they're in goodin theory, because that's what

(48:08):
theory is-- everything soundsnice in theory.
But they are nice in theory, butin reality, they're just at best
bad, at worst super malicious.
Because the world doesn't worklike that.
Because people think that moneyis exchanged like barter.
Like it's back during theAmerican Colonial days, where
you have beaver pelts and you'retrading with the native

(48:30):
Americans for some corn, right?
Money is not like that.
Money is not a medium of barter,it's credit.
The economy, even though it'ssimplistic, simplistic obviously
sounds good and it's easier tounderstand, it doesn't
necessarily mean it's right.
But from simplistic viewpoint,people think, okay, money it's

(48:51):
like barter, right?
I give you A and you give me B.

And that A happens to be money: dollars, euros, yen, whatever. (48:54):
undefined
Or if it's gold standard, and alot of libertarians talk about:
forget about the government, weshould go back to gold standard
and go back to barter.
I give you gold pieces and youcan give me, you know, beaver
pelts, right?
But the thing is, that's not howeconomics works.

(49:16):
Or I should say, that's not howglobal economics works.
Because while between you andsome guy, it may appear like
barter is working, in reality,the exchange of goods and
services, which is obviously theunderpinning of all economics,
that takes time.
There's a time delay in alltransactions.
And for all the accountants thatare listening or anyone who's

(49:37):
dealing with corporate financeknows this.
You have accounts receivable,accounts payable, and there's a
difference between your IncomeStatement, which is the money
that you're entitled to, andyour Free Cash Flow statement.
Also just in general, if you'rean entrepreneur or in charge of
a PNL, you know this, thatthere's a delay between you

(49:58):
spending money to acquireresources, whether it's humans,
you know, employees, or justworking capital, and the time
for that working capital to beput into use.
And then eventually you producethe good and sell it and then
get the money.
So there's a time between youspending money and the time that
you receive money.
That delay contributes to thetime delay in exchange of, I

(50:23):
would say modern economics, butjust even ancient economics.
Economics in general.
I want to do a podcast aboutthis, 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 intothe Old Testament and a whole
bunch of things in there.
And you're like, what the helldoes old Testament have to do
with it?
Trust me, it has to do a lot.
But I'm trying to keep myselfgrounded here, so this doesn't

(50:45):
become like another AUKUSpodcast where it goes over an
hour plus.
Which it probably will.
I don't know, my producer willtell me what the final count is.
Anyway, so there's a time delaybetween money spent and money
received.
And in order for economics towork, there has to be the

(51:05):
financial sectors there tofacilitate or to bridge the gap
between that time delay.
Because I can't just go to aworker who's been working and
say, Hey, look, as soon as ourcustomer pays us for the
products...
Let's just talk about the bananatree, right.
As soon as the guy from OranginaLand pays for my bananas...
I'm gonna ask you to work onthis island and grow all the

(51:28):
bananas and you're gonna do itfor free, but I totally promise
you, that once the guys from theOrange Land pay me money, you're
gonna get that money for all thework that you did, growing the
bananas, right?
It doesn't work like that.
So what you need to do is go tothe financial sector of your
island and the financial sector,what their job is is to say, Hey

(51:51):
, look, we know you're good forthe money because you obviously
have contracts and you're anestablished business.
We're gonna give you ashort-term loan for like 30 days
or whatever, and you're gonnause that to pay for your
workers, right?
And then after you get yourmoney from, from your consumer,
then obviously then you pay usback, plus interest.

(52:13):
That's usually how it goes.
And we're not even talking aboutlong-term the investments,
because obviously we can furthercomplicate it, talking about
savings and investments.
And this is actually one of thethings that they're talking
about with Erdogan and thecollapse of the lira is that in
order to make an investments,you have to save.
But that's actually wrong.
You don't save first to haveinvestments.

(52:34):
First you make the decision toinvest and then you save that
money.
At least as a business.
That's what you do.
So it's not that you needsavings to invest.
It's just savings are the scoresheet or the materialization of
an ethereal decision to invest.
So it's kind of like theaccounting mark of investments.

(52:56):
So you make the decision toinvest first, then you save the
money and then when you canactually purchase whatever
machine that you're going to do,you obviously pay it all from
your savings.
From a simplistic standpoint,you say, oh no, that's stupid.
You gotta save first.
And then you invest.
But the point is, again, ifyou're going into a business or
any financial venture, is thatthe decision to invest always

(53:20):
comes first and you either taketime to accumulate savings or
you take out a bank loan.
And this again goes back to thewhole point of the time delay of
exchange.
And in fact, you don't even haveto take my word for it.
You can go to the IMF or worldbank.
There's tons of papers outthere.
And they talk about how thewhole point of trade finance is

(53:41):
this bridging of the time delaybetween credit and debit.
This time delay of exchange andtrade economics, or just
economics in general, isreliance on the short-term
financing that bridges this timedelay of exchange and most
business transactions.

(54:01):
Like I think it's like over 90%of global transactions take this
form.
The point is, to bridge thisgap, you need this financial
sector, because they bridge thegap.
They allow the seller to borrow,in economic parlance term it's
called working capital, tocomplete the order that they
received so that the purchasecan happen.

(54:22):
So this either happens throughthe short-term loans or credit
insurance.
But either way, again, over 90%of trade in the world falls
under this category of this timedelay of exchange, where the
short-term credit is basicallythe fuel that drives the engine

(54:43):
of international trade.
And what does this have to dowith barter and gold?
Well, the thing is, even if itwas, you know, you had gold
standard again, you had thislibertarian paradise.
Well, okay, fine.
Well, there's still this timedelay of exchange where there's
the time where you have to spendto extract the gold to pay

(55:04):
people, or hire the work toextract it for you.
At that point, you don't havegold, you got to get the gold.
And then after that, then youcan start paying.
But then you're saying, no, noI'm already rich or whatever.
I already have gold.
Well, okay, fine.
You already have the gold.
But again, there is anothershortcoming of classical
economics is that its theoriesare based on static systems,

(55:26):
that it is frozen in time.
So then, okay, you have thisgold, you paid it in advance.
You paid the the workers for thebananas, but you're still
waiting on the payment of theoranges.
There's a time delay there.
And oh, by the way, even afterthat exchange is complete, well
then the next season, you needto acquire gold again to pay the

(55:49):
workers for the bananas and thenget oranges again.
And then so on and so forth andrepeats.
So because we don't just do oneeconomic exchange in our life
and then drop dead.
We do multiple things over,hopefully, a long fortuitous
life.
The economics is dynamic theory.
So even if you have an initialcapital.

(56:09):
Say, you know, you've beenblessed with rich parents, like
Elon Musk.
Eventually there's gonna be apoint where you have to acquire
capital, before you can spend itand realize your economic gains,
that classical theory promisesus.
So that's why this time delay ofexchange is important.
And you just can't think ofthings as bartering.

(56:31):
And again, 90% of globaltrade...
And when you're actually talkingabout it on the scale of
sovereign nations, whichobviously we're talking about
that with the case of Erdogan,of Turkey, of sovereign nation,
I would say near a 100% ofglobal international
transactions involve some formof either credit or some credit

(56:51):
insurance, or some sort ofguarantee to facilitate the
business transactions on aglobal scale.
So, why is this important?
Because the thing is, just likewith inflation, one of the
assumptions in classicaleconomics, when it comes to
theory, is that there should notbe persistent long- term trade

(57:14):
imbalances, all trade should beequalized.
And we know that's bullshit,because America obviously has
persistent trade deficit,Germany and China famously have
trade surpluses, Greecehas a trade deficits.
Trade imbalances, whether it's asurplus or a deficit, are just

(57:36):
the common fact of life.
And there's no free marketvoodoo force out there, pulling
everything back to the center.
And I'll explain why, but firstlet's run through with the
classical theory and to use anexample to illustrate the
classical theory.
Let's use USA and Germany, USAbeing an importer, obviously,

(57:57):
and Germany being an exporter.
And to further clarify this, sothat there's no confusion about
Euro, because it's not reallyGermany's currency, let's talk
about 1990s Germany, right?
So we'll talk about the DeutscheMark and the Dollar.
To make things less confusing.
All right, so if USA is buyingall this stuff from Germany,

(58:17):
that Germany is exporting out,then that means, obviously
United States or, you know, theworld economy, Americans, are
trying to sell all their dollarsand buy all these Deutsche Marks
so they can get all these Germangoods.
And obviously law of supply anddemand, you're selling dollars,
so the value of the dollars isgonna go down.
And you're buying DeutscheMarks, so the value of the

(58:39):
Deutsche Marks is going to goup.
Well, the more Germany exportsand the more US import from
Germany, that the value of theDeutsche Mark is going to go up
and up and up and up.
And the Dollar is going to godown and down, down, down.
And all of a sudden there'sgoing to be a tipping point,
where all of a sudden now thegoods in the United States,
because the dollar is so low,it's going to become cheaper for

(59:02):
Germans to buy from theAmericans, rather than just
buying in Germany.
And also the Americans are justgoing to, frankly, just going to
stop buying stuff from Germany,because the Deutsche Mark is so
valuable, that it's going to betoo expensive.
They're saying, well, I'm notgoing to spend all my Dollars
converting them to DeutscheMark, because it's too
expensive.
I'm just going to buy this stuffin the United States.
So there's going to be a shift.

(59:23):
And now all of a sudden, Germansare going to start buying stuff
from the Americans, so they'regoing to sell their Deutsche
Marks, and they're going to toacquire, they're gonna try to
buy US Dollars.
And the Dollar is going to startgoing up.
And then the Deutsche Marks aregoing to go back until the flip.
And then back to where we wereoriginally.
So there's this constantoscillation, but on average,

(59:44):
long- term average, all tradesshould be balanced.
That's what classical theorystates and in a barter economy
where you're just buying andselling immediately when there's
no time delay of trade.
That makes sense.
That's why it's calledconventional economics, because
it's conventional.
This is what we all believe in.
Most of us mostly believe in.
But again, we can't ignore inthe real world this time delay

(01:00:09):
of exchange.
And we don't just do barteringin international trade, because
international trade is nothingwithout international finance.
So it's not just that theAmericans want to buy stuff from
Germany.
So they're gonna sell all theirDollars and buy Deutsche Marks,
but before we get even a chancefor the Americans to sell their

(01:00:33):
Dollars and buy the DeutscheMarks, because of the time delay
in exchange, what has to happenis that Germans, obviously, need
money first to pay theirworkers, to actually produce the
stuff that's being exported tothe Americans.
So the German financial systemhas to create a line of credit
of Deutsche Marks, whichincreases the amount of Deutsche

(01:00:56):
marks in the economy.
And then the Germanmanufacturers use that line of
credit to pay their workers.
Either pay their workers or payfor the investment or the
capital goods, whatever, toproduce the stuff that's going
to be exported to the Americans.
And only then they give it tothe Americans and the Americans
then sell their Dollars and thenbuy Deutsche Marks to pay them.

(01:01:19):
And of course, then the producergets those Deutsche marks and
then pays back that line ofcredit to the financial bank.
That's actually how it goes.
So what classical economicstates is that okay, the value
of Deutsche Marks should beincreasing, because there's a
higher demand for it.
Well, actually in order fortrade to work, the overall
amount of Deutsche Marks has toincrease, because again, the

(01:01:41):
bank, the financial institutionthat's extended that line of
credit, is increasing the numberof Deutsche Marks in the system.
So if there's more Deutschemarks, well obviously as we know
from, ironically, classicaleconomics, then the more there
is of something, the lessvaluable it is, so that's going
to drop down.
And because there's a 1:1exchange, meaning that the line
of credit that's being createdto produce the export gets

(01:02:04):
immediately wiped out...
Well, not immediately, but itgets wiped out after the trade
has happened, when the Americanspay for the export, it goes
away.
So then the Deutsche Markincreases in value again, but
that initial drop of value fromthe line of credit is
counterbalanced by the increasein value from the export.
But the net effect is that thelevel of the Deutsche Mark,

(01:02:28):
compared to the Dollar, is thesame it's static.
So when we extend this to abroader standpoint, that
explains why we have tradeimbalances in the world, right?
And that's why Americaconsistently runs deficits and
countries like Germany, China,or whatever, consistently run
surpluses.
Because for every export, therehas to be an additional increase

(01:02:49):
of credit or an increase inmonetary vehicles, monetary
currency units to facilitatethat trade to happen.
And because that balances itout, that oscillation theory
that we talked about inclassical economics doesn't
work.
That's precisely because of thistime delay of exchange.

(01:03:14):
So what does this have to dowith Turkey?
Well, I was being a littlecheeky there, because the thing
is, the credit is not a perfectone for one balance, because
obviously why would the bank dothis?
It's not like out of their ownpure benevolence, they're good
people and they're like, yeah,we will totally give you credit
and you do it.
They're charging an interest, sothey're making money.
And because usually this type oftrade financing is done under 30

(01:03:38):
days or what have you, theshort-term horizon, so it falls
under the short-term rates.
Well, what also is theshort-term rate that we think
about?
Oh, the interest rates of theCentral Bank of Turkey.
Or Central Banks of countries ingeneral, right?
Because the thing is interestrates that the Central Banks set
are, essentially, the floor, theprice floor or the minimum

(01:03:59):
interest that banks will charge,because obviously they're not
gonna charge lower because whywould they do that if the
central bank is paying higher.
So if the interest rate in theUnited States is..
Or right now it's 0%, so that'sa bad example.
But okay, in Turkey the interestrate is 15%.
Then the cost for financing...
Again, financing is notsomething, oh it's a nice to

(01:04:22):
have-- it's the essential, likewe just talked about it's the
essential lifeblood of trade.
Is that for any financing that'sgoing to occur to facilitate
international trade with Turkey,the minimum cost of that is 15%.
So by increasing the cost offinancing for trade, because
everyone keeps saying, oh yeah,increase interest rates, because

(01:04:43):
that's going to reduceinflation...
Just like there's an extensionof credit to the exporter so
they can build their goods andwhat have you, there's also a
similar line of credit extendedto the importer, to the
Americans, so they can actuallybuy what they have to buy.
Because on their side, they alsohave a time delay of money from

(01:05:06):
whatever resources that they'redoing within the United States.
And of course that position,likewise, gets closed out at the
end of the exchange so that thenet result of the movement of
currency or the valuation of thecurrency remains zero.
So going back to our comparativeadvantage lesson, while
comparative advantage is a verygood thing to learn about in

(01:05:29):
classical economics, because ofthis time value of credit
comparative advantage does notmatter.
It's not a zero sum game.
What matters is the absoluteadvantage matters, because there
can always be an expansion of Q-- of the quantity of goods or
financial aspects.

(01:05:49):
There can always be an expansionof financial credit.
So more money can always becreated or more goods can be
created.
And because presumably withtrade finance that credit
doesn't get expanded unlessthere's actually goods and
services to be traded, so from atrade financing standpoint,
inflation is not necessarily aconcern, because it only appears

(01:06:12):
to facilitate the trade of thereal goods and services that
comes about.
So that's the point here.
And this is why these tradeimbalances exist.
And so when we come back toTurkey, it's that they're
saying, oh, well the currencydevalued, that means the price
of Turkish exports should befavorable.

(01:06:33):
Never mind, there's the economicscene, which will get to, is
different.
There's no healthy and robusteconomic infrastructure in
Turkey to do a lot of exportsand imports.
Because in order for Turkey toexport, there has to be things
that other countries want tobuy.
Right?
And also Turkey has to be ableto produce it.

(01:06:53):
But even assuming that that'sthe case, because of this
extension of credit that we justexplained to facilitate trade,
you can readily see that raisinginterest rates will not help
Turkish situation.
If anything, it will harm.
I mean Erdogan, well he's wrong.
There are reasons why he'swrong.

(01:07:14):
But at the cursory, the endresults of actually lowering
interest rates is actually agood thing.
Raising interest rates is notthe thing you want to do,
because if right now, if theinterest rates in Turkey are
15%, well, that's the cost offinancing for the facilitating
of trade in Turkey, right?
So if you raise the interestrate, then the cost of financing

(01:07:35):
trade, the cost of doingeconomics, the cost to play the
game is going to increase.
And you're saying, well yeah,but that's good because you want
to slow down the economy, right?
You want to get a hold ofinflation.
That's the whole point.
So that's why Erdogan i s i n the problem.
But again, now you're fallinginto the classical economics
assumption trap of that theeconomy is fully being utilized

(01:07:58):
and when it's being fullyutilized, there's a zero sum

game (01:08:01):
for every give there is a take.
But when you consider Turkeyhaving double digit
unemployment, well clearly theclassical economics assumptions
don't stand.
There's always room for increasein productive capacity.
So it's not a zero sum game.
So it's not a question of, okay,all the resources are being used

(01:08:22):
up in Turkey.
So like the economy is doing sogreat, so we've got to raise the
interest rates and cool down theeconomy.
The economy is already cold.
So raising the interest rates,yes, it's going to cool it down,
but it's going to make thingseven worse.
This is kind of like similar towhat happened with the Volcker
shock in the 1970s in the UnitedStates.

We had the situation (01:08:43):
inflation was high in the United States
and Volcker-- the Fedchairman...
Well before him, they weretrying to raise the interest
rates, but inflation was stillgoing up.
So hi finally said, screw it,I'm gonna raise the interest
rates to a ridiculous point.
And sure enough, he finally dideventually get the inflation

(01:09:04):
down, but in the process,unemployment shot through the
roof and it completely destroyedthe American economy.
Fortunately United States is apretty robust country, so that
we rebounded.
But if you ask the people backthen in the labor force, was
what Volcker did good?
No, it was not.
In fact there were all theseprotests going on.

(01:09:26):
If you remember back then,there's like news clippings,
where there were protests allover the United States.
And like even farmers, forexample, parked, clogged up the
streets of Washington DC byputting their tractors and what
have you, and heavy machinery infront of the Federal Reserve
building as a protest, becausehe just completely wrecked the

(01:09:46):
United States economy.
It's like, yeah, the economyslowed down, but you know, it's
like telling someone, oh, youneed to lose weight.
But rather than then going on onexercise and diet, they chop off
their legs.
It's like, okay.
Yeah, you reduced weight, butthere're bigger problems now
there.
So that's the thing it's like,yes, you need to control

(01:10:06):
inflation, but you can't do itat the expense of the economic
health of your country.
And the classical theory ofraising interest rates to slow
down economy is absolutelycorrect.
And I'm not knocking it at all.
But it does it at the behest ofreducing consumption, and at the

(01:10:27):
same point, reducing production.
Consumption and production goinghand in hand there.
So if your economy is alreadyshit in the sense of employment,
which obviously in Turkey,unemployment is atrocious,
raising interest rates to cooldown the economy-- well, the
economy is already freakingcold.
You don't wanna go like absolutezero here.
So that's the error that thepeople are making.
So to Erdogan's credit...

(01:10:50):
Well, I don't know if it is tohis credit, I don't know if he's
actually thinking this, becauseagain, we already talked about
his reasons are more having todo with his own religious
economic theories.
But besides the point, let'sjust steel- man this.
To his credit, he's kind ofright: you don't want to raise
the interest rates, becauseinflation is not the end all-be
all.
The economy, the wellbeing ofyour citizens is what matters.

(01:11:12):
And to make this more precisely,to bring this argument home, if
the economy's like a pizza...
Bear with me with the analogyhere, it's not perfect, but food
is not exactly economics, butokay.
You have, you have your basepizza, which is essential to
have.
I'm not talking about theChicago deep dish style pizza,
I'm talking about real, realpizza.

(01:11:33):
I don't have to say New Yorkstyle, Brooklyn style.
It's fricking pizza.
But anyway, so for real pizza,you got your dough and then you
got your sauce and your cheese,right?
That's your absolute bareminimum for you to have.
And then you could add otherstuff on it: pepperoni,
anchovies...
Not pineapples, screw you,pineapples is not a freaking

(01:11:55):
topping.
But anyway, put whatever thehell you want on it.
And you can put all the frickingtoppings on that you want.
But at the base of it, you haveto have your pizza pie, right?
You have to have your baseingredients.
Otherwise it's no longer pizza.
So with classical economics,assuming slowing down the
economy, there's a specific baseamount of economic activity that

(01:12:18):
has to happen in a country forthe country to function.
You have to have water, you haveto have at least bread or some
basic substance, some food, acursory amount of electrical
energy.
Keep the lights on.
You have your base level ofsanitation, whatever.
These have to happen.
You can't compromise on them.
Because if not, then youbasically, you have Somalia.

(01:12:41):
Apologies to the Somalianslistening.
So everything else, all othereconomic activities, those are
like the toppings on the pizza,right?
You can have more, you haveless.
And that, that can fluctuate,but the country will still move
on.
People will still live.
And this is kind of like whatpeople talk about: living wage
versus a minimum wage, andpeople should be able to live.

(01:13:03):
All the extra economic activity,industry, commerce, whatever
that goes on top of it-- that'sall good.
And you can play around withthat because the base level of
living of your citizens is stillgonna progress.
So this is the whole point ofthe distinction between
developed nations, developingnations and underdeveloped

(01:13:26):
nations, and also dysfunctionalnations.
Depending on who you ask,whether underdeveloped or
underdeveloped nations, theydon't have the base level of
goods and services to providefor the general welfare of their
citizens.
Developing nations, generallyspeaking have most of it.
And they have some extraeconomic activity.
Developed nations, obviouslyhave all that, plus you know,

(01:13:49):
all that and a bag of chips,they have all the extra stuff.
So you can play around with theeconomic output of the country
and not affect the lifestyle orthe quality of life of your
citizens.
So Turkey, obviously, it's notdeveloped nation, but it is
considered to be developingnation on the whole, where you
have your customary goods andservices, whether it's roads,

(01:14:12):
energy, bread, water, et cetera.
But obviously there is extraeconomic activity.
But on a whole it's not robustenough to carry on as the main
engine of the Turkish economy.
The reason why this is importantis that while the Americans or
Europeans or what have you,Japanese.
Hell, even the Chinese to acertain effect, can mess around

(01:14:36):
with the levers of theirnational economies, Turkey
doesn't have that Liberty.
Because with the assumption inclassical economics mean that,
okay, the inflation is too high.
Uh, so we need to slow down theeconomy.
Well, if developed economy,okay.
Yeah.
You can afford to reduce youreconomic output, because the
quality of your life, theessential economy, if you will,

(01:14:58):
the pizza crust of your economy,that part is still going.
You're not reducing that part.
When using the losing the weightanalogy, you're not chopping off
your leg.
You're, you're exercising,you're getting rid of your belly
fat.
But with Turkey, they don't havethat.
Businesses are underwater there.
And trying to cool down theeconomy means that with

(01:15:22):
developed nations definitely,and in most cases, or in some
cases, with developing nations,you have a base level of
economic activity that has tohappen for a generally accepted
quality of life for yourcitizens.
Let's called that X.
So anything above X you can playaround with, and this is why
classical economics say, Hey,inflation is too high, raise

(01:15:45):
your interest rates to slow downthe economy.
And the assumption is thatthere's a lot of stuff above X.
So you can slide the scale upand down still above that X
level, that's necessary forquality of life.
And that slows down the economy,which brings inflation back
under order.
But with Turkey, there's notmuch above the X.
And some might even arguethere's not even X for a lot of

(01:16:07):
people in Turkey.
Again, we got double digitunemployment.
That's not even considering theunderemployments-- the
impoverished people who aretechnically employed, but don't
have enough money for theirbasic goods and services.
And in the population of theiryoung people that unemployment
is even higher.
I think it's like 46% orsomething ridiculous like that.

(01:16:28):
It's just insane how their youngpeople are not working.
Their most productive age groupis not even employed.
So cooling down the economy,while from a cold calculated
economic standpoint, maydefinitely slow the economy.
It's kind of like the Nordenbombsight that was tested over

(01:16:48):
the bombing ranges in WesternUS: Western US bombing ranges is
not 1943 Berlin, you know, withthe Luftwaffe and the
anti-aircraft shooting at you.
It's a real world.
And that the laboratory arecompletely different.
And the same thing here withclassical economic theory and in
this case, Turkey-- a developingnation.

(01:17:10):
So what this means to theshopkeepers is that they still
have to produce their work.
It's not like your Facebook.
And you're like, oh my God, theFed increased the interest rate,
so now I can't sell too manyads, so my economic output is
lower.
No, in Turkey, you actually havebakers and butchers who are
trying to bake bread and meat tosatisfy people's dietary needs.

(01:17:33):
And you're saying, oh well,let's, let's increase the
interest rates and slow down theeconomy.
Well, people still need breadtoday and they're gonna need
bread tomorrow.
And they need meat today, andthey're gonna need meat
tomorrow.
It's not like the economicoutput is going to decrease,
because after a certain pointyou got rid of all your belly

(01:17:53):
fat.
If you keep exercising andrunning a caloric deficit, your
body's gonna start metabolizingyour muscles and then your
organs, and then that's howstarvation happens.
So that's kind of like what'shappening or that's what people
are essentially asking Turkey todo.
And even if that were the case,it doesn't work, because they're
not gonna stop making bread.
They're not gonna stop makingmeat or whatever.

(01:18:15):
And again, because of the timedelay of trade, the businesses
are still going to be working.
And inflation is already bad.
Prices are already increasing.
They barely are making endsmeet.
Increasing the interest ratemeans increasing the cost of
financing, which we've alreadyestablished is the lifeblood of
facilitating trade in the firstplace, which means you're adding

(01:18:36):
another, an extra artificialcost on an already overburdened
economy.
Which means the baker now notonly is barely making ends meet,
because the price of flour hasskyrocketed.
But on top of that, thatshort-term financing that he
needs to get to be able to sellthe bread, buy the flour and
sell the bread.
That time delay that financingfrom the bank, the loan is going

(01:18:59):
to increase.
So it's going to further burdenhim.
And again, he can't, he doesn'thave the option to not sell
bread, because this is hislivelihood.
He doesn't have savings andpeople need bread.
It's not like people are gonnastop eating or the sake of the
economy humans have real needs.
So that's why while classicaltheory is sound, I'm not saying
classical theory is wrong.

(01:19:20):
It's just, the assumptions areonly applicable to a specific
narrow case.

Again, think like LeMay (01:19:27):
what's good for the bombing range is
not, not necessarily good forGermany, and it's definitely not
good for a bombing campaign inJapan.
And the same thing, classicaltheory might work in the
laboratory.
It may even work in someisolated cases with, uh,
developed nations, but itdoesn't work in a developing
nation like Turkey, andspecifically like with Turkey.

(01:19:50):
And there are test cases of the,where Argentina, for example,
they've been constantlyincreasing their interest rate
to slow down their economy.
And what's happening is theinflation is still going up and
up and up.
Japan, on the contrary, theyhave deflation and they're
trying to increase inflation.

(01:20:11):
So again, conventional economictheory says, okay, lower
interest rates to haveinflation.
And they're basically at zero,well, there are negative
interest rates now and theystill have deflation.
They haven't had inflation inalmost 40 years now.
So if we just get out of ourAmerican or Western bubble and
see what other countries aredoing, you can clearly see that

(01:20:32):
classical economics doesn'twork.
And again, I'm not saying thatclassical economics is wrong.
It's just, it's only correct invery specific isolated cases,
where you have full employment,you have the full use of your
economic power or your economic,uh, utility.
And also that you have zero timedelay in your exchange of goods

(01:20:54):
and services.
So if we're going to raise theinterest rates in Turkey, the
baker is still going to continuebaking bread and trying to sell
it.
But of course, now it's gonna beeven less of a profit or, or
even at a loss.
In companies, or whether it'sindustrial commercial companies,
they still have to produce,because people still need their
wages.

(01:21:15):
But their costs, their profitsare already low as it is.
It's gonna be even lower or eventhe point where they can't
handle.
They actually just go under andthen people lose their jobs.
And in that case, well, okay.
Yeah, you do have less moneychasing fewer goods, but not
because you've healthy, in ahealthy manner, reduced
inflation by reducing the moneysupply.

(01:21:37):
What you did was people havebeen laid off, because companies
can't afford to employ them oreven worse, companies just shut
down altogether, which means nogoods are being produced.
And if no goods are beingproduced well then yeah, sure,
then by definition the demand isalso zero, which means there's
no inflation.
So I guess, okay,congratulations.
You've solved inflation, but atwhat cost?

(01:22:11):
Going back to the time delay oftrade, another interesting
anecdote or tidbit on this isthat it's kind of funny that if
you look back in history or inrecent history, a lot of the
financing that caused theprosperity or that was the

(01:22:31):
progenitor of the prosperity ofTurkey, where people were
talking about, oh look, Turkeyis the model, developing nation,
look at their economy andeverything like that.
A lot of that financing wasaround the 2008 timeframe.
And when we're talking aboutlong- term investing, the
average time horizon for thosetype of debt instruments is
usually 10 years.
And when did the economy startgoing to shit in Turkey?

(01:22:53):
Well, around 2018?
And that's because what happensis when you have short-term
financing...
Again, it's not like classicaltheory where it's a static one
and done deal.
There's a constant flow of tradegoing on, which means there's
constantly credit being extendedand being extinguished as trade

(01:23:14):
flows back and forth.
And another thing about thisinterest rate is that these
companies get financed on thesebonds.
With long- term bonds, obviouslyyou have higher interest or
rates.
And the point is that, or theassumption is that these
companies are going to use theselong-term bonds to make big
investments, big capitalinvestments or whatever, to grow

(01:23:36):
their business.
This is obviously standards,nothing controversial about
that.
And after their business grows,obviously they make more profit
more money and they can pay backthe loans that were granted to
them 10 years later.
But the thing is, what happensif the economy is not healthy or
if the loans were given in anunproductive manner?
Then those profits are not beingrealized.

(01:23:58):
And I'm not saying like this issome sort of a Ponzi scheme or
something like that.
A lot of times it just doesn'tnecessarily realize.
You can be exuberant in theloans or the risk calculations
weren't done properly.
The company's still viable, butthey don't have the cash to
completely service their debt.
So what happens is, well, banksare not cold hearted people,

(01:24:21):
contrary to what a lot left-wingpeople would say.
But they see this and say, okay,well the bones of your company
are sound, we're looking at yourBalance Sheets and your Income
Statements, we see yourfinancials are good.
So what we're gonna do is we'regonna extend you more debt.
So you basically take anotherloan out, which is used to pay
off the original loan.

(01:24:42):
And then now you have morecredit, so you can go do more
stuff and then you can expandyour business.
And this revolving line ofcredit, a lot of company, even
in the United States and inEurope, this is just the
standard thing.
There's a revolving line of debtthat you do.
In fact, a lot of companiespurposely take debt even when
they don't need it.
Google and Microsoft, you know,Amazon-- they're famous examples

(01:25:05):
of this, because you getactually tax breaks from the
interest payments from bankloans that you wouldn't get from
just raising capital from yourequity.
So the extension of credit andthe rolling of credit, it's a
constant thing in the economyand raising interest rates means
that 10 years ago, because ofthe economic prospect landscape

(01:25:27):
was optimistic means theinterest rates were lower.
And if you're at this pointwhere like, okay, your
financials are good, but youdon't have the free cash flow to
service all your debt, getting anew loan-- that's now, all of a
sudden, it has a higher interestrate, well now all of a sudden,
yeah, your revolving line ofcredit-- now the cost of that
has increased.
Not because you're asking formore money, but because

(01:25:48):
servicing that debt is nowincreased.
So raising your interest rates,when your economy is based on a
revolving line of credit is alsodamaging.
And yes, again to the classicaleconomists' credit, yes, you're
going to absolutely slow downthe economy, potentially slow
down the, uh, inflation.
But doing so in this particularcase means the company goes

(01:26:11):
under.
This is exactly what happenedwith Lehman brothers back in
2008 or whatever it was.
It wasn't that Lehman brotherswas...
I mean, sure they've done shadythings, just like a lot of other
banks, but that's besides thepoint.
The point here is that the bonesof their company were actually
really sound.

(01:26:31):
It's just that they had thisliquidity squeeze.
They didn't have the cash to beable to service whatever debts
that they had.
And they couldn't revolve thedebt: banks wouldn't lend them
new lines of credit to keepgoing, because they were
over-leveraged on differentthings.
And obviously there's tons ofreports on this, but they
famously went to the UnitedStates government to ask for a

(01:26:52):
bailout, and George W.
Bush said no.
And of course they went underand they failed.
But their assets didn't fail.
And what happened was, likevultures to carrion, all the
other big banks took all theseamazing assets of Lehman
Brothers and bought them pennieson the dollar and incorporated
them, and improved their BalanceSheets.
So it, it was good for them.

(01:27:14):
It sucks for Lehman, but it waspretty good overall for the
banking sector, because theunderlying assets of Lehman
Brothers were good.
It's just, they were underliquidity squeeze.
And that's kind of essentiallywhat's happening in Turkey now.
Well, not essentially, becausethere's other issues about the
bones of the economy, not beinggood, which we'll get to, but

(01:27:35):
when you have a liquiditysqueeze, if you can't find debt,
if you can't find people to lendyou debt, then your company will
go under.
And in order to find debt, theriskier your company is the more
interest you have to pay.
And if the Central Bankincreases the interest rate,
well that means the floor, thestarting position of that

(01:27:57):
interest rate is going to go up,and is only going to further
increase the interest load thatyou have to find to be able to
service your debt.
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 immediateneeds.
Again, in 2008, when a lot ofthese lines of credit were being

(01:28:17):
extended, the Central Bankinterest rate was below 20%.
And normally like, who caresabout what happened 10 years
ago?
Because most functioning, atleast developed countries have a
sound economy.
So the prospects and health ofthe companies are going to
expand and only get better.
But if they don't, well, thenwhat happened 10 years ago
matters with these revolvingline of credits.

(01:28:37):
Because guess what happened in2018?
The central bank interest ratewent above 20%.
And that means the cost ofrevolving your debt, obviously
it was higher.
And if your company can't evenservice the principle or the
original interest, a new loan,obviously being more, puts you
under a greater financialburden.

(01:28:58):
Now, another factor of this thatwe need to consider is that
unlike countries like the UnitedStates, UK, Japan, where the
credit that's being extended isin your home local currency to
finance and facilitate therunning of your ventures, the
credit that was being extendedto Turkish companies during this

(01:29:23):
2008 period of economicprosperity, that Erdogan on was
ushering in, did not come fromTurkey.
It came from American andEuropean lenders, which means
that the debt that was beingserviced was not a Turkish Lira,
it was a foreign currency.
Which exposes you to foreigncurrency risk.

(01:29:43):
Because if you have a loan inlira and inflation happens,
well, actually, hell that'sfreaking good.
Because if the loan that youtook out was for, let's say, a
million liras, now a millionliras today is now worth only,
you know, a hundred thousandliras.
Well, I'll make that deal everysingle day.
Inflation.
This is the whole point of themortgages, right?
Mortgages are an awesome thing,generally speaking, because, to

(01:30:08):
take an example, when you takeout a mortgage, you take a
mortgage for the value of thehouse now, but you pay it off in
30 years.
And the value of the mortgage,which is constant, 30 years from
now is worth considerably lessbecause of inflation.
When you were paying, let's saya hundred thousand dollars in
today's money, a hundredthousand dollars 30 years from

(01:30:29):
now is not gonna be worth thatmuch.
So hell, you're actually makingmoney.
Add that on top of the fact thatthe value of the house
presumably is going up.
But you can see why housing isgenerally considered a good
investment.
But that only works because thevalue of the dollar has
depreciated.
You know, you have inflation andmaybe healthy inflation, but

(01:30:51):
inflation nonetheless, but thevalue of the dollar in the
future is worth less than thevalue of the dollar today, and
your loan being in dollars,that's what you pay, so you
don't really care.
It's, that's what it is.
But when it's a foreigndenominated debt, your inflation
is actually a problem, becauseyour loan, in case of Turkey,

(01:31:15):
the loans that the Turkishcompanies took out were in
dollars or euros.
So, this is obviously wrong, butif the lira and the dollar is
identical, and you take out amillion dollar loan, okay, well,
you've got to make sure you havea million lira and you can plan
your financial forecast, thatokay, 10 years from now, when I
have to pay back this loan, Ihave to give these US debt

(01:31:40):
collector a million dollars.
So, okay, that's equivalent to amillion lira, but I'm good.
Just budget a million lira,because obviously I work in
lira, right?
So I'm good to go.
But now with inflation, youstill have to pay the million
dollars, but now a million liradoesn't give you a million
dollars.
What you have now is you need 10million lira to give you a

(01:32:01):
million dollars, and you don'thave that money because you
didn't plan for that type ofmoney.
And what happens is, in the caseof the Central Bank or in case
of the central government ofTurkey, their debt that they
were being serviced on, whichwas in dollars and in euros,
well they need to pay back thesecommitments, right?

(01:32:21):
So the only way to do that wasprint more money, have more
liras.
And to an extreme case, this iswhat happened during the Weimar
Republic in Germany is that alltheir debt that they had to pay
to the Allied powers, especiallyFrance and Britain, were
dominated in, in Franks andSterling.
The Germans had to pay thismoney to the French, reparations

(01:32:44):
for World War I, but theyweren't going to pay them in
Deutsche Marks.
They had to pay them in Franks.
And at the same time, the Frenchtook control of the SAAR Land,
which was the industrialHeartland of Germany, which
means that Germany couldn'tproduce stuff, because the
French controlled it.
So they didn't have the means toproduce stuff, to make their

(01:33:05):
Deutsche Mark actually worthsomething.
So the only way they couldactually service the French
Frank debt was to print moreDeutsche Marks to keep up with
inflation.
But of course, when you printmore Deutsche Marks, then the
value of Deutsche Mark goesdown, and then the case, like a
never ending death spiral, youhad hyperinflation.
And that's all because theydidn't have the productive

(01:33:27):
capacity to finance the foreigndenominated debt.
And to a certain point, that'swhat you have in Turkey is that
Turkey needs the service, thedebts that are maturing, that
they took back in 2008, 2010,2012 timeframe that they just

(01:33:47):
went on a debt binge, becauseeveryone thought that Turkey was
the darling developing nation.
So foreign creditors were givingcredit to Turkish companies and
Turkish government left andright.
Now the chickens have come hometo roost and said, okay, well
you need to pay back your debt.
But because all that moneywasn't put to good use, now you

(01:34:08):
have inflation and they don'thave the money to pay back.
On the open market no one wantsto buy the lira, because the
Turkish economy is shit.
So in order to get the dollars,they have to spend more liras
obviously.
And to do that from a foreignexchange standpoint, that's
obviously inflation.
And so what can the Central Bankdo?
Well now, if it takes 10 timesmore liras for a dollar, then

(01:34:32):
you're going to print 10 timesmore lira to service those debts
that you have to pay.
And of course, by doing that,increasing the monetary supply,
increasing the amount of liras.
Classical theory, where in caseof M equals P, well now more M
means more P so the price of thedollar increases, which means
you have to pay more.

(01:34:52):
So we're starting to get to thepoint where the initial cases of
a potential death spiral.
You can clearly see this andthat most of the debt debt that
was being offered during thisheyday of this Turkish
Renaissance was almost to theday 10 years ago, which is
considered the average lifetimeof typical long-term debt

(01:35:13):
structures.
And this is not some sort of outof the blue thing that happened.
The value of the lira, just fromgeneral inflation and just the
general aspects of being adeveloping nation, there was

inflation (01:35:24):
lira was constantly losing value.
It's just that it was consideredacceptable and manageable.
And assuming you have the bonesof a healthy economy, well, the
economic output that shouldproduce should, in theory,
counteract, and then some, thedepreciation of your currency.

(01:35:45):
But once the initial wave ofthese long-term debts began to
mature in 2018, and you saw,yes, the lira was depreciating
value, but it really skyrocketedaround the 2018 timeframe.
Which again, oh, coincidence ornot, you can make that choice
yourself, but that's when thefirst volume of these debt

(01:36:07):
instruments came to mature.
So how could have this beenavoided?
And that is, well, if you haveforeign debt, presumably you're
taking that debt to producethings that foreigners would
want.
So that if I'm a Turkish companyand I'm taking a Euro debt,
that's presumably to make aninvestment on something, to

(01:36:28):
create something that I can sellback to the Europeans and
they're gonna give me euros.
And then with those euros, Idon't have to worry about
currency risk, and I can usethose euros to pay back the debt
that was granted to me.
And this, again, this comes backto international trade.
If you're gonna take foreigndebt, you want to be able to
make sure that you're exportingto that originating country or

(01:36:53):
economic region in the case ofthe Euro, at least enough to
service the debt of thatcurrency denomination.
So in the case of Turkey, youneed to make sure that you're
exporting enough stuff to UnitedStates and to Europe to acquire
the US dollars and the euros topay off US Dollar and Euro

(01:37:14):
loans.
But what do we know about Turkeywith their trade?
Well, they're not a netexporter.
They're a net importer.
So not only are they taking, notonly is the Turkish government
and Turkish companies takingforeign debt, but they're also
trying to acquire foreigncurrency to buy the things in

(01:37:37):
Europe and United States.
It's not like they're buildingup a reserve or a reservoir of
dollars and euros to pay backtheir loans.
Any dollars in euros thatthey're picking up, they're
immediately using to buy goodsand services from the United
States and Europe.
And that's obviously not a goodthing.

(01:38:03):
And the reason why this has beensuch a poignant issue recently
is that it's already bad enoughthat Turkey is a net importing
nation, but you had this perfectstorm of not only the maturation
of these foreign denominatedebts, but what happened in
2020?
Well, the COVID pandemic hit,right?

(01:38:24):
Well, there's a couple of thingsthat happened.
And specifically with Turkey,their biggest exports are heavy
machinery, textile and tourism.
Those are the big things.
Now what has happened recentlyin the international scene?
Well, you had the Trump's steeltariffs and what did that do?

(01:38:44):
Well, that obviously put adownward pressure on Turkish
imports of heavy machinery.
Not only their steel products,but also just the general
industrial machinery derivedfrom those steel products.
They were, aren't able to exportthose.
It didn't just affect Turkey.
A lot of the steel exports thatTurkey does doesn't even go to
United States.
I think it's only like 5% orsomething, but those tariffs by

(01:39:07):
the virtue of the United Stateseconomy, United States being the
United States, it affected theglobal worldwide price of steel,
which had cascading effects thatultimately reduced Turkish
industrial exports based onsteel.
Then with textiles and tourism,obviously they dropped during

(01:39:28):
the COVID pandemic.
Well, obviously tourism went toa complete standstill.
So you're not getting that.
Now add to the fact just generaleconomic growth.
Usually if the sovereign countryis financing its own debt with
its own currency, it hasreasonable power to keep the

(01:39:49):
economic engine going.
Say what you will...
I mean, that's why, like thewhole joke about Mussolini is
like, well, at least they hadtrains running on time.
Is that dictators may be badfrom a political or a social
standpoint, but there's nothingsaying that dictators are bad
for the economy.

(01:40:09):
If anything, because they don'thave to deal with internal
politics, they theoreticallycould be very good for the
economy.
And Erdogan, yes was a strongman.
It's not like foreign investorswere stupid or naïve.
They knew he was a strong man,but with the message that
Erdogan was giving back duringthe early days of 2003 to 2008,

(01:40:30):
timeframe was liberalization ofthe market and providing a lot
of economic opportunity forforeign investors.
And if you're an investor, wouldyou rather get zero to 1%
interest on your investment inthe United States or would you
rather get 20% in Turkey?
Now, obviously there's a risk,because Turkey is, you know,

(01:40:52):
riskier than the United States,but the risk premium that you're
going to get, if it's largeenough, you're like, yeah, why
the hell not?
And this was definitely the caselast decade where economists all
over the world were saying thatTurkey is the darling developing
nation and probably the safestdeveloping nation to invest in.
And so you're gettingridiculously high, in the

(01:41:15):
perspective of a developednation, you're getting
ridiculously high returns from apractically un-risky country.
Now, what did Turkey do withthis?
Did they actually take thatforeign debt from those foreign
investors and actually dosomething productive from it?
You can argue yes or no, butmost people would argue, no.

(01:41:35):
All you have to look at is theGDP of Turkey over the past
decade.
But also notably during thisdecade, you had things like the
Gezi Park protests, you had thissupposed 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

(01:41:56):
kinda like the opposite ofRussia in that whereas Putin is
in with the oligarchy.
Well, yes, there's an oligarchyin Turkey, but they're against
Erdogan.
Or they were against Erdogan.
So whereas Putin-- he works withis oligarchy to, if not improve
the Russian people, at leastimprove the Russian Federation,
Erdogan actually actively foughtagainst the Turkish oligarchy

(01:42:20):
and put a lot of them to prisonand whatnot.
And it was also if the oligarchyis in prison, well, there's not
much...
That's going to shake theconfidence of foreign investors
in the ability to extractfinancial returns from
investments within Turkey.
Again, you can have politicalinstability in your country.
Again, going back to thatMussolini joke or anecdote, as

(01:42:41):
long as you're controlling thefinancial instruments of credit,
because especially if you're theautocrat, you extend the credit
based on your whim.
But if other people, if aforeigners are doing it, if they
perceive the investment to betoo risky based on whatever, but
in this case, because ofpolitical risk, well, that's a

(01:43:03):
big problem.
And if the whole basis ofrunning your country is
predicated on the perceivedun-riskiness of the political
climate of your country byforeign investors, well doing
politically risky things likejailing opposition leaders and
businessmen and having thesecoups and whatnot, doesn't

(01:43:27):
exactly help invest theirconfidence.
And there's nothing saying thatthey have to invest in Turkey.
They'll take their money andtheir capital and invest in in
another developing country.
And of course, once they dothat, we'll then not only do you
have to increase your interestrates just from a general
classical economics theory, butyou'll also have to increase
your interest rates to attractthe foreign capital in, in the

(01:43:50):
first place.
And of course, increasing theinterest rates to attract
foreign capital that has gone toother countries that puts even a
further burden on your society,on your citizens.
And then of course on the otherside of the coin is it's not
just about the exports, but it'sabout the trade imbalance, if
you will.
Of the difference betweenexports and imports.

(01:44:12):
And with Turkey, despite havingeconomy, that's been mismanaged
to the point of not producingreal or stable or healthy
growth, there has been a lot ofeconomic activity, especially in
agriculture and construction.
But what do those agricultureinstruction rely on?
Well, that requires energyconsumption.
And if the price of energy isgoing up, not only with COVID,

(01:44:33):
but just in general, Erdoganantagonizing of Russia.
Well, Turkey is reliant on theRussian natural gas, not only
from a general energyconsumption standpoint, but most
of the fertilizer that Turkeyrelies on for their agricultural
sector comes from natural gasthat Russia provides.
So an increase in the prices ofnatural gas, or even a reduction

(01:44:55):
of the flow of Russian naturalgas, not only increases the cost
of energy, but by the fact ofreducing energy means that it
reduces your economic output.
Which means, again, anothereffect of not being able to
service the debt that you havein foreign currencies, because
you're not producing enough.
But even from a more broaderperspective, one of the reasons

(01:45:18):
why Turkey, despite being adeveloping nation is almost
paradoxically an importing one,a net importing nation is
because traditionally Turkey hasalways had high inflation, which
again, high inflation in itselfis not necessarily bad if it's
managed right.
You just keep pumping in moremoney.

(01:45:39):
And as long as people make moremoney than the inflation, it's
good.
It's not ideal, but it'smanageable.
It's okay.
But the thing is what thatcauses from a psyche standpoint
or zeitgeist, as Germans wouldsay, is that the Turkish people
as a whole, generally have lowsavings, because why would you
save your money If inflation ispersistently high?

(01:46:02):
Whatever money you have now, youshould immediately spend it.
And this is the cultural thing.
You go to Turkey.
And then if you have a Turkishfriend and you go to a
restaurant, you know, one way toegg him on this is just that you
you're gonna pay.
And then of course like everyoneon the table is like, no, I'll
pay, no I'll pay, no, no I'llpay.
It's a big, it's a big thing.
And there's a big fight goingon, who's going to pay.

(01:46:22):
And then eventually someone does.
But the point here is that inthe culture of Turkey, is that
wanting to pay for things orjust not saving money, just the
general part of tur or society.
Conversely, for example, inJapan, it's the complete
opposite, right?
Japan has a chronic savingsociety.

(01:46:42):
They constantly save money,which is one of the big factors
in the deflationary troubles ofJapan is that everyone is
saving.
So the economy is not movingalong.
You're getting all the deflationand, and with deflation, meaning
the yen is constantly gainingvalue, which encourages the
Japanese to save even more.
And then you have a death spiralin Japan's case, but you have a

(01:47:05):
spiral nevertheless in theopposite.
So with low savings, if you havelow savings, that means you have
low investments, right?
According to classical economictheory, which means that you're
not increasing the productivecapacity of your country.
Well, if you're not improvingthe productive capacity of your
country, but presumably livingstandards are increasing or your

(01:47:26):
population is increasing, whichin Turks definitely is the case.
Big population boom.
Turkey had a huge populationboom in the past few decades,
which means that Turkey needsmore goods and services.
But if there's no investmentsgoing on because of the lack of
savings, then the only thingTurkey can do, or the Turkish
people can do is increase theirimports to gain those goods and

(01:47:49):
services.
So trade imbalance that youalready have, that predisposes
Turkey to importing..
Just the..
Because of the cultural orsocietal norms of not saving
because of this ethereal spiritof inflation, it only
exacerbates that tradeimbalance, to make Turkey even

(01:48:11):
more of a net importer.
Which again, there's nothingwrong with that, provided that
your economy can handle theimporting.
And in the case of foreigndenominated debt, you can have
enough exports to counteractthat drain of currency.
So yes, Erdogan is an autocrat,but he was also a populist.

(01:48:33):
That's how he got into office inthe first place.
One of the things that he saidwas that the current political
climate, or back then thecurrent political climate was...
It's essentially the same thinghere in the West.
It's essentially it's the rightwing politics, but you know,
whatever.
That's not good or badnecessarily.
To basically saying, in somecases rightfully so, or in a lot

(01:48:54):
of cases rightfully so, theTurkish political elite were
only servicing elite and thecommon man was being left on the
wayside.
So in this populous wave ofsupport that Erdogan got, one of
the things that he wanted to dowas to improve the lifestyle of
the average Turk citizen.

(01:49:15):
So he need to make a lot ofinvestments.
And with all the economicliberalization policies that
Erdogan introduced during hisfirst couple of years back then
as a prime minister, heattracted a lot of foreign
investment.
And of course, if you're tryingto rapidly grow your foreign
investment, you'll gladly takeit.
But of course, foreigninvestment does have a specific

(01:49:37):
risk if it's not servicedproperly.
And with the perception offoreign investors, that Turkey
was not only a safe country, buta model developing nation, well,
of course it's going to beflooded with financial
investments.
And the more financialinvestments are being flooded,
obviously the interest rates ofthose investments are going to
be low.
So essentially even though therisk premium of a supposed

(01:50:01):
developing nation should be at aspecific high level, the amount
of foreign investment that wasflooding the Turkey meant that
it was actually cheaper than thequote market rates of a
developing country.
So why wouldn't you take it?
Okay.
Well, we just explained whyclassical theory doesn't apply
here based on the, the CurtisLeMay effect.

(01:50:24):
So you're probably thinking,okay, well, you know, let's

close up the shop (01:50:27):
we got it, Erdogan clearly is right, and he
should lower interest rates.
I mean, we just spent, I don'tknow how long, but we talked
about all the underlyingconditions, why he should be
lowering the interest rate.
It makes more sense...
Well, actually, despiteeverything I just said, I agree
with the classical economist.
He should be raising theinterest rates..

(01:50:49):
And I'll tell you why in PartII.
So stay tuned for the thrillingconclusion of this episode! If
you would like to comment onthis podcast or on the topics

(01:51:11):
covered within it, or you'd likeus to raise a new topic in our
next episode, please feel freeto leave us a message or a
voicemail on www.codbsm.com.
That's Charlie, Oscar, Delta,Bravo, Sierra, Mike, dot com.
Thank you for listening and seeyou at the party, Richter!.

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E5: Bombing the Turkish Economy - Part 1

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.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}E5: Bombing the Turkish Economy - Part 1