Central Bank Cut Interest Rate Again

Central Bank Interest Rates

I have been thinking about this interest rate issue for a long time. I have a lot of questions. I'm not an economist, I'm not educated in economics, but I have to know about finance as a profession. Therefore, I can say that I have some knowledge sometimes by reading and sometimes by living.

I have actually shared my views on these issues with you in a few articles before. But as I said, this interest rate issue really sticks in my mind. In previous articles, I did not go directly into the subject of interest.

Let's think about this issue together today and try to understand what the people in charge are trying to do.

First of all, interest is forbidden by religion, nas! There is no doubt about that. In fact, usury is forbidden by religion, that is, lending money and charging interest on it, but let's not dwell on that now. Let us examine what interest is, what harm it does and what happens if it is not allowed.

The State Determines the Volume of Money in the Market

I prefer to look at the issue from the state's point of view, because the state controls both the production and circulation of money. I am talking about our national currency, the Turkish Lira! Therefore, I would like to analyze the issue from the state's perspective first.

What does the state do? It prints something called money, says take it, use it in your exchanges. I have written before, people used to exchange goods, but with the invention of money, it became easier to exchange goods. Those who are curious can take a look at what I have written on this subject before, the historical development of money is in the previous articles.

Yes, pieces of paper or metal called money have been used in exchanges throughout history with the guarantee of the state. We have set a price for everything, goods, labor and services, and we humans continue to live with the money exchanged for that price. No one in the animal kingdom has thought of this yet.

What is a state guarantee for money? If you give money back to the state, you get something in return. What is the return? Whatever you can afford, the state has to give you whatever you want in return for the money you bring back. What you want is up to you, a little bit of what the state can give you. If you want to buy land if it can be sold for your money, if you want to buy a good produced by the state, if you want to buy a service, it's up to you. Within the territory of the country, you can buy anything you need for that money, not only from the state but also from the people living there. Trade is guaranteed by the state.

For example, you grow lettuce in your garden, you give the lettuce and get money, then you use the money to buy bread and cheese, you feed yourself. With the money you have left over, you go to the state and say, give me another hundred square meters of land, I'll plant more. You plant carrots there, for example. You see, money is a useful thing.

If only everything was that simple, right? But it is not!

Managing a National Currency is Not Just "Printing Money"

You don't know what to do when you have to pay more tomorrow for what you can buy today with the money exchanged. Yesterday, when there was no money, you could exchange a bag of lettuce for a kilo of potatoes, but now that there is money, you have to sell two bags of lettuce to buy a kilo of potatoes. Then you ask for more money for the lettuce you can grow.

What happened to the state guarantee? The state gave you the money, told you to use it for shopping, and you started to use that money because it was convenient and because you trusted the state. Things are getting complicated, aren't they?

Anyway, that's the money aspect of it, but I want to focus on interest, as I said at the beginning. I wrote this example to remind you that money is actually a circulating medium of exchange within the country.

Yes, the state somehow produces and circulates money. There are various methods of producing and circulating money. Putting money into circulation is one thing, but in order to provide certain state services to the people, the money in circulation needs to be returned to the state. There are various methods for this too.

The main method of returning money to the state is called taxation. The state levies taxes on everything from needles to thread, and with these taxes the state pays for the services it needs to provide, in other words, taxation actually means that some of the money produced returns back to the state coffers. With this money, the state puts money back into circulation according to the plan it has made beforehand, that is, according to the budget. Here is a simple explanation of economics. Economics is the art of keeping money in circulation properly and fairly. Money is a means, not an end, it should not be an end.

At this stage, I will not go into the issue of foreign currency, nor will I go into the energy and imported goods that are procured with foreign currency. I don't want us to get confused. Our subject is the Turkish lira and its circulation within the country.

Let's say we are examining money that can be produced under state control, perhaps with a little ink and a little paper, or even digitally produced today without the need for these costs.

State Budget, Income-Expenditure Balance

The state also has certain expenditures that it makes with this money that it produces and puts into circulation. So the state also needs its own money. There are public employees, civil servants, they need to be paid for their labor, then there are the services it buys from the market, the goods it buys from the market. I'm talking about public procurement tenders for goods and services. There are the investments it makes, roads, railways, their maintenance. There are investments in electricity generation and distribution, and their maintenance costs. There are military expenditures, security expenditures. There are the shares it distributes to municipalities. There are the costs of education, the costs of health services. On and on and on. I won't count them all now. I mean, there are a lot of budget items that the state has to use money for.

The income and expenditure items of the budget should normally be in balance, a balanced budget! The taxes collected from the people should be able to cover these expenses. But it doesn't happen, either because of the goods and services that have to be bought from abroad, or on purpose, because of the logic of let's borrow and grow.

When the money collected through taxes is not enough, the solution seems to be easy, don't you print money, just print money again for the amount that is not enough.

But as the money in circulation increases, human psychology, people are looking for a place to spend the excess money they have, they start to spend money easily on many things that they don't necessarily need, or if they had too much money for something that was one unit yesterday, it is not so difficult to give two units of money today. He distributes the money he has too much, and that's that.

Of course, this applies to those who have plenty of money. If they have the means, that is, if they produce something, they start demanding more money for what they produce. When there is more money in the market, the products find their value and more money can be earned, and more money in the market means easier spending and more earnings.

What do those who don't have money do? Or let's say those who can hardly access money. Those on fixed incomes. They are also starting to have difficulties in this situation. Yes, the monster of cost, the monster of inflation!

What does inflation mean?

The proliferation of money in the market means inflation. Unbalanced distribution of money means the cost of living for some. While some people can spend a lot of money, others don't know what to do due to lack of money.

Therefore, it is natural to find a balance. I think the main task of the state should be to ensure this balanced distribution of money. But this is a matter of expertise, it is not that easy. And of course the intention is important. The state can distribute money fairly if it wants to. The state has enough tools at its disposal to do this. As long as it has the intention!

What are the tools at the state's disposal to ensure a balanced distribution of money?

Taxes! Yes, since it is in the hands of the state to legislate a proper tax system, here is a solution for balance. A fair tax code! But how much can those who have money, and money is power in this case, support those in charge? We live in a capitalist system and everyone is worried about money. Because politicians need the rich who have accumulated money to get to their seats, they have never been able to organize taxation in the way they should, and they will never be able to organize taxation in the fair way they want! Whoever comes to power will be prevented from taking action on this issue. Because politics depends on money. It is a sine qua non of this system.

To summarize, the state needs money somehow, and if it prints money again, liquidity increases and inflation occurs. If it raises taxes or tries to regulate them, someone prevents it. So what will the state do?

The solution is to borrow money from the market. If there are people who have somehow accumulated money from the money it has printed and put into circulation before, it will borrow money from them and make its expenditures with this money!

What is Interest?

Now we come to interest. No one can lend money without charging interest, and they don't.

Let's not call it interest, let's say that no one invests their capital without earning a profit. Money collected through government bonds or government securities indexed to a certain income. Actually, I think it is the same thing. After all, it is borrowed and interest is paid!

The most important institution that human beings can think of to keep control over the circulation of money is the bank! So there are banks for the control of money. Banks are the intermediate stations where the money earned is somehow accumulated and distributed to those in need.

Instead of keeping their savings under the pillow, banks are financial institutions that depositors can entrust with peace of mind, under a certain state guarantee, and that they can withdraw and use again whenever they want. In the meantime, people eliminate the risk of their money being stolen from under the pillow. On the one hand, banks are the preferred institutions for people to keep their money as they earn some interest income.

While banks lend these deposits to those in need in return for interest, they are also a source of money for the state. The state can borrow the amount it needs for its services from banks in return for interest.

Repo, Borrowing, etc. Transactions

The interest rate on this debt is determined according to the current market conditions. You may ask what this means. Let me try to explain.

When the state needs money, it holds a tender and meets this need from whoever is willing to lend at a lower interest rate. In return, it issues debt securities or government bonds. When the bonds mature, it returns the debt with interest.

However, monetary transactions between the state and banks are not limited to this. The central bank has duties defined by law. The central bank has to balance the amount of liquidity in the market. It does this through a series of open market operations with banks.

First of all, even if the state does not need to borrow, it has guaranteed to borrow the accumulated deposits held by the banks from the banks at short maturities in return for interest. After all, the state printed the money and this is a guarantee in a state system.

The state has also guaranteed to lend money to banks at interest when they need it.

These transactions are called repo and deposit transactions.

While banks park the money in the vault at night in the state vault, they can take back the money they parked in the morning in order to be able to return their money if they want a loan during the day or if depositors want their money back.

What is the Policy Rate?

Sometimes, on the contrary, banks need to borrow from the government. Somehow they have a commitment and their deposits are insufficient. The interest on the money borrowed by these banks from the state is called policy interest.

In other words, the interest rates of the money borrowed by banks from the state with a state guarantee or the interest rates of the deposits parked at the central bank at night are determined by the central bank and its name is policy interest. It is not the interest rate when you and I need money, but the interest rate for transactions between banks and the state.

This is where the storm is brewing. In recent interest rate setting meetings, the central bank has been lowering this policy rate every time at the government's suggestion. Last time it was 13%.

What's wrong with that, isn't interest forbidden by religion? Wouldn't it be nice if it was abolished altogether?

Let's think about it, what would happen if this policy interest rate was really zero?

Let's say the government says I can lend you as much money as you want and I don't want any interest. What happens then?

You are a bank and you have a free source of money. You don't even need depositors to make money. You have to pay a little interest to the depositors, and the state is giving away free money. How nice!

In this situation, would you bother with the depositors? Each one of them has a thousand and one problems, you have to open so many branches, there are pensioners, there are civil servants, there are those who have saved a penny and brought it. You have to serve them all. All those expenses, paper costs. There are the staff you have to employ, for example, there are their expenses, there is the rent for the branch space you rented, the furniture, the paint, the electricity, the water, the heating, the cooling, all these are expenses. You installed all those computer systems, it costs a lot of money. The safe, security. The risk of robbery, a thousand other risks.

Forget all that and take money from the state for free, and then give it back to the state with interest in the evening. In any case, the state needs money and puts out a tender. 

If it were me, I wouldn't even bother lending to those in need, I would thank all the staff, lock the shop, and start working only with the state with a minimum staff. I have found a goose to be plucked, would I miss it? What is the need for all this effort?

In short, zeroing the policy rate is against the nature of things. It is an obstacle for banks to fulfill their functions in the national economy. It destabilizes the country's economy!

Banks are now working only with the state: The Most Profitable Business

Perhaps this is why those who want loans from banks have not been able to get them lately.

Since banks have been able to find as much cheap money as they want and lend it to the state at higher interest rates due to the lowered policy rate, they have put aside their main duties. In a sense, instead of working with depositors and those in need of credit, they have prioritized working with the state. The give and take scheme, banks are also commercial organizations, they were established to make a profit and now they have the chance to make a profit without too much risk.

But they are actually cutting their own legs out from under them, even though they are making high profits for the time being, they are causing the wheels of the economy not to work properly and they are pouring gasoline on the fire!

In other words, banks are not or cannot fulfill their main task in the economy.

What should be done? You collect deposits from depositors and distribute them as loans to those in need. You will get your commission in between. Thus, you will provide capital to those who want to invest. Investment means both production and employment. On the one hand, the state will control the circulation of money. If it is a tax, the state will collect the tax; if it is a formal economy, the state will keep track of it. Are these things happening right now? I think not. Even if it is partially happening, at least there are disruptions and setbacks.

I would say that the people who set up this system are not aware of what they are doing, but they all understand these things better than I do, so I think this is a conscious choice and a deliberate system.

And what is the reason? Why does the state knowingly and willingly allow banks to make such profits through such a system?

I am not entirely sure, but I think they have lost control of the economy. They don't know what to do. It is possible, anything is possible when there are no competent and meritorious staff.

They may be afraid of banks going bankrupt like in previous crises. Therefore, they may be trying to at least keep the banks away from the economic crisis with such a scheme. After all, they are openly financing the banks from outside. Could this scenario happen? I think so!

But it was clear from the beginning that an unnecessary interest rate cut would upset the economic balance. So why did they play with the policy rate?

Where We Are When We Say "Interest Cause Inflation Consequence"

Is it just personal spite?

Is it the thesis that "interest is the cause and inflation is the effect", as our chief economist famously put it? Is the aim to prove this thesis?

The result is obvious, this thesis is wrong. Since September 2021, we have been floundering in the interest rate inflation spiral. Don't those in charge see that everything is out of balance? Why don't they give up this meaningless proof?

If you say, no, it's not about the thesis, it's about religious reservations, I disagree. If that were the case, I would ask where they have been for twenty years.

Or, okay, let's say the issue is religious reservations, nas! Then why did they choose to lower the policy rate gradually? Just write a decree and say that it is zeroed out and that it is not religiously permissible, and that's the end of it.

The lies that our exports will increase with cheaper labor are not valid either, it is the Chinese system, that is how it is done in China. The obvious is not a guide. Most of the exports you can make depend on imported goods, the more you cut interest rates, the higher the exchange rate, the higher the exchange rate, the higher your costs. Moreover, the public is being crushed under energy and other expenses due to the increase in foreign exchange. The proverbial pot is starting to boil.

If I tried to explain the relationship between the policy rate and the exchange rate now, it would take too long, so I won't go into it. But we have all been following the exchange rate for many years, and even the deafest people know that the exchange rate skyrockets when interest rates are lowered. 

Where does politics want to take the country's economy?

Yes, I am really trying to understand, what is the reason for these interesting policies?

If I say religious obsession with interest, it is not. Let alone zeroing it, even as it is, the interest rates on loans in the market have jumped, and as a state, you can only get the money you need by paying higher interest rates, and that has also increased. I'm not even talking about the foreign exchange, that's a different story, but the foreign exchange has skyrocketed as a result.

What is your problem? Do you intend to sink this country? Let it sink, let it collapse and let us all be buried under it, is that it? And then you want us to build a new country in our own way? Is that what the foreign powers want? They have you firmly in their grasp and are making you do whatever they want. If so, tell us openly and let's stop them from destroying the country together!

What is really your problem?

If I say it's a concern for power, would any sane person do that? How will those who put the country in such a crisis win in the elections? Even if you have fanatical voters, it is not enough to win, do you think people are not aware of what is going on?

Do you think that pulling rabbits out of a hat at the last minute will help? Believe me, it won't. Paper and ink are free, do you hope that we can print and distribute the money and somehow fool people again? I really don't understand.

Maybe we will borrow money from abroad, we will allow money laundering in the country if necessary, we will take other measures, for example, we will cancel the elections with the YSK if necessary, and we will still win the elections? I wonder if this nation will allow this again?

Why do you persistently continue to do the same thing when you see that this monetary policy is wrong?

I really don't understand, I try to understand with all my good intentions, but I just can't, it's incomprehensible.

Anyway, it seems you don't realize what you are doing. I hope the public has also realized that there is no hope from you anymore.

I think there are cadres in this country who can govern the country properly. I think that smart, meritorious and insightful cadres will come to power as soon as possible and save the country from this strange situation.

As for the public, I don't know, as I said, I hope that they have come to their senses. Although there are still fanatics in street interviews, there are still fanatics who don't know what they are saying, but if you dig a little bit, you come across your supporters who declare that they are not satisfied with the current situation, but the majority of the people want a change, that is certain. The winds of change are blowing!

Everyone is now aware of the cost to Turkey of these crazy policies and their damages, everyone is living it and everyone is impatiently waiting for the elections.

What the opposition needs to do as soon as possible is clear. It will prepare its program that will turn the country around and explain it to the people in a good way. One by one, in a way that everyone can understand. It will identify its cadres and explain to the people one by one who will be responsible for what, again in a way that everyone can understand. These will be cadres that everyone is sure know what they are doing. A good team, a harmonious and competent team.  And at the head of it, like an orchestra conductor, a presidential candidate whom everyone respects will appear before the people and explain. He will not ask for votes, he will just explain how he will do it.

If the cadres are reliable, if the program presented is a good program, and if the program is approved by experts, this nation will not hesitate to assign new cadres with confidence. No need to ask for votes, the nation already knows!

As long as there is a reliable staff, there is no need to drown in details, everything should be simple and concise!

I think this is the only way we can get back on track!

Love and regards to everyone from Moscow.