By Ibrahim Dayyan, 08/01/2022
Coronavirus shutdowns around the world pushed countries into crisis mode. Amid the death and destruction of lives, jobs and business, governments to tackle these issues cut down traditional economic thought with an unprecedented rescue spend . This effort to soften the blow from what’s expected to be the worst economic freefall since the great depression has already seen over $10 trillion injected into nations across the globe, leaving economists scratching their heads, attempting to predict the unpredictable.
One inescapable consequence is inflation. Milton Friedman famously said: “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
The traditional way to control rising inflation is to contract the money supply by raising interest rates. So why has Erdogan opted to go in the other direction, defying conventional economic wisdom? To answer this, we must look at what interest rates are, why they are perceived to be important to the economy, why it can be harmful and does raising interest rates actually reduce inflation? It is also important to discuss the belief system that drives much of the western world as it is through this lens that Erdogan’s actions look incredibly foolish.
Interest has been around for thousands of years, slowly over the centuries weaving itself into the fabrics of the modern world, from the homes we live in and into the textbooks at school. Interestingly, Jesus Christ's only act of ‘violence’ was to expel the usurers (bankers of his time) out from the temple, and as recently as 500 years ago , if you practised usury you’d be committing a crime under British law. This begs the question, how is it that usury went from a scorned activity to an unchallenged status quo that has wedged itself in every aspect of our lives?
Part of the answer lies in a lack of not just financial but moral education. The destructive nature of our economic and financial systems are disguised by jargon and complexity that is not just impenetrable to the layman, but as the 2008 crisis proved, even the heads of the very institutions that create financial products of mass destruction, are equally ‘ignorant’ of the Frankenstein monsters engineered under their watch.
Prof. Richard D. Wolff studied at what’s considered to be the foremost universities in the world; Harvard, Stanford and Yale. He notes that the intellectual conformity that exists at these elite institutions is hampering our ability to deal with the crises that we face.
“I spent 10 years of my life in the undergraduate and graduate learning program.10 continuous years, that's 20 semesters. During that time in 19 out of the 20 semesters, I was not assigned to read one word critical of capitalism. 19 of those semesters were studied in celebrating how efficient capitalism was, how beautifully organised how equitable I kid you not. Even though we lived in a society where the difference of income and wealth and power were obvious, we were constantly told, no no no, this is the best system the human mind has been able to develop”.
This is essential to this discussion. If world leaders and society at large are not given the tools and education to develop a critical perspective on the economic models taught, and only one narrative is pushed without an opportunity to be challenged – we’re heading down a very narrow path.
Interest can be defined as a recurring rate charged on a sum and is often referred to as the cost of borrowing or reward for saving. In the case of a loan, this sum is called the principal and until the principal plus the interest accrued overtime is paid in full, interest repayments will continue to rise. There are two types, simple and compound. Both have the potential to increment towards infinity, though compound interest will do so exponentially.
Now that that’s clear, let’s look at the role interest rates play in the economy. Interest cannot exist without debt. And so, with a debt-based economic system, it is useful to look at what the implications of both interest and debt itself has on the economy, with the former being the primary focus.
Since the entire economy and its growth is financed by debt, the role of interest is as a powerful lever to control the amount of debt in the economy. With this tool, you can either spur investments and growth (with low rates and higher borrowing) or slow things down when everyone gets a little too excited (with high rates and lower borrowing). There are many types of interest rates, the most important of which is the one set by the deceptively named central bank. The interest rate set at the central bank feeds through various channels to affect a wide variety of other interest rates in the real economy, such as credit card rates, business loans, mortgage repayments and so on, giving the central bank enormous power to essentially control the economy.
Thomas Jefferson, one of the founding fathers and third president of the United States said.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around (these banks) will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.”
So how does simply changing an electronic digit by a few notches have such a huge impact?
Think about it like this, 90% of the money supply in the world today is not actually money, but debt issued as credit by private banking institutions through a trick called double entry accounting. That’s something like $300trn and represents the enormous dependency of our entire economy on a few very powerful individuals. It’s difficult to overstate the significance of this fact, considering from an individual perspective it is hard to imagine what that really means on a macro level.
To do this let’s think about all the money in your bank account and where it came from. Most probably it was your employer. Where did they get their money from? Most likely two main sources; a) loans and credit to start and grow their business, and b) from consumers like yourself.
So back to your bank account, 90% of the money in it, entered the economy at some level through debt. And all debt has an interest repayment due on it. A repayment that over time as we explained earlier can tend towards infinity, making it increasingly unaffordable. You may not realise it, but collectively society is repaying this astronomical debt plus the ever-growing interest due on it through taxes and other hidden means such as inflation.
Another point to reflect on here is that the only institutions that can create money are the banks. If we imagine that the economy has £100 in it, 90% of which is debt issued by banks at a 10% interest rate. The economy, i.e. society, after a year will have to pay back £99 (£90 + £9) to the banks. This leaves the total money supply in the economy at just £1 which is not enough to run an economy on. So, the economy borrows a further £99 at the same interest rate, bringing the total money supply in the economy back to £100. Now after a year, at the same 10% interest rate, the total repayment of society to the banks is £108.90 (£99 + 9.90).
But there is only £100 in the economy, where will the extra £8.90 come from?
Of course, the only ones licensed to print money and finance the difference are the banks. And so, to repay back the £8.90 owed to the banks, the economy borrows once more. Yesterday’s debt can only be repaid by taking out more debt today, and so begins the vicious debt cycle. Notice also, these interest repayments suck the life out of the economy as all its money is employed to service the interest on the debt which means there is less trade and real productive economic activity occurring.
What we must also understand is that we are in effect the collateral for all of the gambles and bets made by financial institutions. They seek to profit without providing any real value to society. Printing, trading and speculating are all the result of a mentality that usury develops in a people where they start to chase insane incomes through the valueless act of moving money around and producing profit from nothing. "Someone who doesn't have a product, and neither expects to have it nor will have it, sells this product to someone who also neither expects nor wants to have it, and in reality, does not receive it". It’s insanity, whilst we do the real hard work of creating and exchanging real goods and services - they play around in fancy-suit-land. And when reality strikes, like in 2008, they are bailed out at the public's cost, through austerity , higher taxes and inflation. Even then, the bankers still have the stomach to suggest they are entitled to lofty million-dollar bonuses .
This reminds me of the saying, ‘they are capitalist in seeking profits, but socialists when it comes to sharing risks’. In other words, ‘profits are privatised and protected whilst losses are to be taken into public ownership’ — a similar story transpired during the pandemic where government contracts flowed freely to their close contacts .
The disconnect between what’s happening in the real markets and fictional financial markets has never been starker . To give you a sense of the magnitude, imagine that $1 was the value for all goods and services, then $26 would represent the value traded in the financial markets. The prime culprit for this crime against humanity is the practice of trading money for money, otherwise known as usury.
Almir Colan gives a great analogy of the consequence of this disparity between the real and financial markets.
“If the economy were a person, and that person experienced tumour growth that was 26 times larger than their body, what would be the chances of their body working and functioning well? Unless removed, that tumour would continue growing until it killed the body. How are banks supposed to make a meaningful return on trillions of dollars worth of fictional assets? Their profit cannot come from real economic activities any more than the sick body can feed that large tumour. To keep this bubble going, even bigger and more complex financial instruments need to be created to pay larger bonuses to clever bankers who come up with them. This is exactly what we have perfected, a self-inflating bubble economy. Unless we change our ways, it is not very difficult to predict that the next financial crisis will be far greater and deeper than the last!”
This crisis has crippled and held individuals, families, nations and the world hostage In its effort to repay the unrepayable debts created by the banking system who have it 'in their interest' to print as much money as possible, further deepening the problem. And so we have, like the hare, entered into an unwinnable race, chasing unsustainably after a carrot that is dangled in front of us with the promise of economic growth and stability.
With the infinite potential upside of interest and the guaranteed security that a loan supported by collateral offers, it is not surprising that banks concentrate upon interest-based loans as a financing means as opposed to shared risk investments. The consequence of which is a debt-based economy that is naturally biased towards the lending of funds to wealthy individuals based on the fact the collateral and assets they possess assures the repayment of the banker's loan plus interest in the event of the borrower's default. “A bank is a place that will lend you money if you can prove you do not need it” Bob Hope
A depressing reality of this is that most of the injections and stimuli provided by the government enters into the economy through the upper echelons of society. This means that before inflation even kicks in to destroy the lower classes' savings and purchasing power, the wealthiest are able to get everything at a discount. Enabling them to grow their businesses, capture the maximum upside on appreciating assets boosted by the increased money supply and give more power and privilege to those who already have it. Far from trickling down, income and wealth are instead being sucked upwards through a broken system designed by bankers and protected by the law.
This is evidenced by the undisputable growing inequality plaguing modern society. The richest one per cent of the world's population now own more than the rest of us combined. And the trajectory looks grimmer, with every week bringing news of new financial records being broken. According to the Federal Reserve, the wealthiest 10% of Americans now own a record of 89% of all stocks — so much for ‘the democratization” of stocks owned by households.
All this did not come about by accident. But rather the result of a broken economic model that has spread across the global economy. Allowing individuals and firms to use their power and position to capture more and more economic gain for themselves. Pulling on their puppet politicians to pass policy, everything from deregulation and privatisation to financial secrecy are the result of expensive lobbying efforts to protect their ability to do what? Continue playing a rigged game they can never lose and achieve trillion-dollar score lines without lifting a leg. Note, in this game of deception, the other team is you, the public, and they — the bankers — aren’t even on the pitch. No wonder the world is confused.
For all the reasons stated above, it is quite clear usury skews the economic system to favour the rich and widens the gap between the rest of society, further fuelling social disorder, inequality and unrest.
"I believe that banking institutions are more dangerous to our liberties than standing armies," Thomas Jefferson
Another extraordinary result of usury is resource allocation. Since only enterprises that have assets can leverage loans to scale further and dominate business activity within the economy, monopolies and conglomerates grow to unparalleled sizes at the cost of small businesses. The outcome of this has manifested itself in different places, from the standard of life to quality infrastructure and the environment.
Compare the disinterested cashiers at the big box supermarkets to the small grocers owned by families who had a proud and dignified position in the local community, before they were eaten up by the likes of Amazon. There is even speculation that with the rise of automation, that a significant segment of society will be reduced to living zombies.
When asked about job destruction and what it would mean for our society, Jeff Bezos suggested “that we should consider adopting a universal minimum income. Or, he added, ‘a negative income tax where every citizen is granted a cash payment that will be sufficient to stay above the poverty line”.
Simply put, at least in his vision, the future doesn’t involve jobs for human beings. Surprising? No — the absence of people at the world’s largest company warehouses is a slight glimpse of the future. A future world built on a capitalist paradigm would be through monetary means only.
You may be wondering, what is the link between this and interest?
‘The last time the e-commerce giant tapped bond markets it issued a three-year bond at an interest rate of 1.9% in 2017, the FT said. At the time it was raising money to fund its purchase of Whole Foods”
To answer this, you only need to look at the incentive it provides. Why would a businessman who makes a 30 per cent profit on funds invested want to share that profit with investors, if he can finance his takeover using a loan at 1.9 percent interest? Usury provides the incentive for a debt-based economy and this has far-reaching consequences such as the disappearance of proud local business owners and their reappearance as disempowered shelf stackers, stocking a valley of choice and variety, camouflaging the same conglomerate group that owns them all. These superstores then leverage enormous monopsony power to rob the developing world of its resources.
Poor infrastructure is another consequence; “Interest charges typically devour at least one-third of a project's cost, with the result that today's infrastructure is a shadow of our former achievements. Just compare the flimsy modern extension to London's St Pancras railway station with the beautiful original that John Betjeman helped save for the nations” An extract from People First Economics.
Take a trip to London and have a look at all the new builds, you’ll be met with blocks of uniformity , each building as equally sad and plain as the one before it. Unfortunately, it’s not just infrastructure that has been unable to escape the jaws of short-termism that usury incentivises, the environment and all its vibrant variety has been adversely affected too. Tarek el Diwnay whose book, The Problem of Interest, inspired the ideas in this article explains this beautifully.
“An immortal goose that lays one golden egg per week should not have its immortality traded in for the sake of two golden eggs per week in the meantime. It appears however that some natural assets can be sacrificed at the behest of discounted cash-flow analysis. Whether such sacrifice takes the form of desertification, the extinction of a species or the immensely long-lived pollution of a nuclear power plant, the principle remains the same. Compound interest values the distant consequences of current actions at next to nothing. The problems come home to roost for a future generation that has no say in their creation”
Discounting cash flow analysis is a method for assessing the profitability of a project. A key part of the discounting equation is the interest rate. The higher the interest rate the more profitable, according to the equation, it becomes to pursue short term initiatives such as intensive farming as opposed to more sustainable methods. A real-world consequence of this is that the fastest deforestation countries in the world are also among its most indebted. Rainforests are sacrificed in order to earn enough to pay off creditors charging high-interest rates who more often than not, are the already rich developed countries.
Something closer to home — 60% of the food that we consume in the west is ultra-processed . If you look at the populace in the villages in rural areas, they do not need to eat nearly as much as we do. Why, they eat real food that they prepare themselves with their own hands, leading to a more healthy, satisfied and happy lifestyle. Again, the connection between usury may appear to be far-fetched, on a surface level glance I’d think so too. However, if you look at the root cause as to why we produce at the levels we do, it isn’t the desire to consume more that has allowed us to do so, but the financing pressures that has made it possible for wealthy nations to pressure developing nations to utilise intensive farming, child labour and other cut throat methods to yield and attract the incomes they need to service their debts.
In a globalised world, the exploitative role that interest plays within a nation is extended across borders, leaving quite literally no stone unturned, from the trees that give us oxygen to the food we eat. From this, we can see the extent to which interest rates affect the incentives and decision-making process behind any transaction that involves money. And money is everywhere used to transfer value, giving proof of the argument that interest affects every aspect of our lives.
Colin Price in Time Discounting and Value (1994) also comments: “We are prepared to go along with discounting because abandoning it would give our own interests less important than we would like; it threatens too uncomfortable and too uncompromising a departure from our present shameful indifference to the distant future”
The United Nations Development Programme (UNDP) estimated that up to five million children die in Africa every year due to the pressures that debt service places on national budgets. In addition to facilitating the escape of billions of dollars through western sovereigns state such as the U.K’s infamous Cayman Islands, the entirety assistance packages so ‘nobly’ given by developed countries to the developing world are typically less than one-quarter of the debt service payments that flow in the opposite direction . This means for every dollar that goes in four comes out.
As if that wasn’t enough, the IMF (central bank of the world) who processes this intra-country assistance packages, faced the worldwide Millennium Debt Cancellation Movement on the eve of the year 2000. Instead of total cancellation they reluctantly agreed to allocate a support package of a miger 34 billion dollars to benefit 23 heavily indebted poor countries (HIPC ) . Not only that, they had the audacity to suggest complete debt forgiveness is unreasonable, and what is on offer is enough. Data suggests otherwise, in two decades, out of a list of 41, only 2 countries have been removed from the list . Financial instruments are the new form of colonialism and interest is the weapon they wield to subject nations to their imperialist agenda.
Why would a system without interest and debt-based financing yield different results?
For two reasons, shared risk obeys natural laws not shared by usury and aligns the interests and incentives of all those involved in a manner that produces the best possible outcome for society. The fundamental point is banks wouldn’t lend if they weren't allowed to lend on interest. And so we wouldn't have a debt-based system. They also wouldn't trade in money which has led to a financial system dependent on growth compounding forever. And so we wouldn’t have such a huge disconnect between reality and fiction.
Instead what we’d have is a financial institution that would assess a project based on merit not on the existing assets it holds. If we look at most rags to riches stories, it isn’t the banks that funded the early growth. They only appear once the company has already grown considerably through venture capital (VC), bootstrapping or other means to accumulate assets that give the banks confidence to lend. That is however slowly changing due to the digital transformation that has shifted everything from groceries to laundry online, meaning most businesses today produce digital assets such as software that banks simply do not understand or are unable to assign value to, until of course, they figure out how to seize these intangible assets.
Looking at all the social, political and economic implications of interest, we can begin to understand that the harms of usury far outweigh the benefits and why it is prohibited by almost all religions, except of course the predominant religion of our time — capitalism.
Now that we’ve covered the problem that usury presents and why it should be eliminated from society. Let us move on to the belief system that brandishes interest to achieve its excessive and unnatural obsession with indefinite growth. Why I feel it is important to consider this is that Erdogan stated religion as one of the primary reasons for his opposition to usury. In order to make sense of his religious motivation, we must look at the other religion and God that is being worshipped.
Capitalism and indeed any other belief system not guided by divine law will inevitably lead to oppression. Because it neglects the fundamental fact that no matter how hard the government tries, greed is a desire that can only be regulated by morality. The greedy will always be able to circumvent rules, for no legislation can truly control human wit and behaviour as evidenced by each and every financial crisis that has passed us by.
A belief system where materialism and consumerism are encouraged, and individualism is rewarded will always produce inferior results than one which takes into consideration the role of the spiritual and emotional needs and rights of human beings. Why save, when the desire to consume can be satisfied now? If there is no afterlife, then surely there's no need to follow rules? We must try to accumulate as much gold and enjoy this life as much as possible.
This mindset dictates much of the behaviour in the financial industry, where traders dream of recessions, aware of the cyclical nature in which the commercial banking system expands and contracts the money supply and profits from it in the process — all key factors in encouraging a 'boom-bust' cycle. A cycle that we’ve come to absurdly accept as an unavoidable part of life, when in the Islamic world, the price of bread held its value for hundreds of years. Today, it takes less than a decade for it to double in price.
How they managed to accomplish all this is a direct consequence of their ability to create money out of nothing. And lots of it. If you control 90% of the world's money it becomes very easy to leverage that power against the government and ultimately the people. The commercial banks following the 2008 crisis spent Incredible amounts to lobby against US bills in an effort to loosen regulation and continue doing whatever they want. Almost a decade later, In 2015 that figure in the US alone was $2bn.
This figure represents the price they are willing to pay to continue extracting real value from the economy in the name of ‘regulation’ kills ‘efficiency’ — the centre of the capitalist free market argument. An argument they push through a sweet narrative of GDP growth figures and celebrations of technology breakthroughs that have dazzled a somewhat gullible audience that sits below the stage, eagerly listening as the capitalist conductor continues to play his compelling song; the only way to eliminate poverty is to press ahead with economic growth and that the ‘infallible’ free market will distribute its treasures. At the same time behind the ‘freedom’ curtains they orchestrate instruments to suck even more wealth from the unsuspecting audience. A persuasive act that can be uncovered by cold statistics, 1.1 million homes are in negative equity — where homeowners owe more on their outstanding mortgage than their property is worth. That’s the American dream.
'Money makes a good servant but a poor master', a point the majority of capitalist advocates fail to understand, except for a select few that sit above the rest, who know this very well and use it to their advantage.
Whilst we have examined capitalism, it is worthwhile to note socialism is not a solution either. Without total economic reform, they will just be playing in the capitalist playground with all the financial climbing frames and structures still intact, capable of producing the same outcomes only under a different principal.
Why no one questions them or the narrative that ‘the government is doing all they can’ is because the banks also heavily influence the media. Large media advertising allocations contribute to the censoring of content, and the fact that 48% of all financial sector coverage was initiated by the banks themselves is also a testament to this.
‘Considering the scale of the crisis, it could be argued that the media’s response was remarkably muted. While the volume of banking coverage increased, overshadowing other business sectors, only a relatively small fraction of the stories appeared on the front pages of the newspapers. Around half of all stories were also reported in a neutral manner” Media Coverage of Banking and Financial News by Robert G. Picard, Meera Selva and Diego Bironzo.
Peter Oborne , former chief political commentator resigned from his job at The Telegraph after he was censored from writing about HSBC because it was one of the paper's major corporate advertisers.
‘The media relies heavily on corporate advertising, often for more than 50% of its revenue. Just how much varies for different media outlets”
Unlike murder and theft, the destructive impact of usury is not always obvious. Economists and politicians intentionally or unintentionally have ignored the prime suspect responsible for all the crises we face. And the media has been used to distract us from this fact, wasting time on ‘finding’ clues and regulatory solutions, whilst the stench from beneath the floorboards makes it quite clear that the evidence needed to solve the case is right where they stand — if only they had the courage to hold their breath and look.
On the other hand, religion adds accountability to a Supreme Being into the economic equation. Unlike capitalism it does not reject the link between freedom and morality and sets clear boundaries. The incessant desire to accumulate, hoard wealth, cheat and speculate are all also strictly prohibited in most world religions. The result of which is God-consciousness and a religious framework that provides a balanced approach to economic progress and growth — impossible in a secular belief system that segregates and ignores essential values not represented by the dollar, such as purpose, contentment, family and charity – an act capitalism deems ‘irrational’.
The Islamic economy that Erdogan is inching closer towards and one that is often cited as the solution, in my view does not promise a perfect economy. Muslims fundamentally believe this life is a test, and part of the test is an economic struggle. What an Islamic economy does promise is the most just outcome possible. It balances all the emotional, spiritual and physical needs of human beings in a miraculous equilibrium. When a famine strikes, hoarding precious commodities such as food is not just a crime against the law of the land and an assault on basic morality, but also accountable to God which strengthens the incentive to adhere to the regulations set. These are some of the essential pieces missing in a capitalist, communist and any other secular system designed by man.
“Interest rates up, interest rates down. Please, let’s remove this from our book. Interest rates make the rich richer and the poor poorer. Let’s know this well and act accordingly” Erdogan in an address to the Businessmen Association.
We’ve looked at why Erdogan's move towards an Interest-free economy governed by religious principles as opposed to capitalist ideals is a positive move. To make this argument, we have discussed in depth the problem that interest represents to society and covered briefly the failure of capitalism. We did not however look at how the move towards zero interest will affect the Turkish economy in the long term and whether or not lowering interest rates towards zero does in fact increase inflation.
There are many criticisms of Erdogan’s handling of the current economic situation, In particular, what’s questioned is the ‘independence’ of the central bank and the decisions they were ‘supposed’ to have made. Pandemic labour shortages caused supply chain disruptions that not only increased the cost of production and transportation but also reduced the level of output. With a more expensive limited supply and rising demand exacerbated by huge expansions in money supply, companies were forced from both sides to push prices up, a phenomenon that is evident in every nation on earth — especially for a country like Turkey. As a net importer, supply disruption and price hikes have a disproportionate effect and contribution to inflation.
Conventionally, in response, it would be expected for the Turkish central bank to raise interest rates and match it to the inflation rate. After which everything would apparently return to normal. On the surface that makes sense. If you have 20% inflation and a 15% interest rate with $100 in the bank, you will have lost 5% ($5). Anticipating your money-losing even more value, you'd spend more now. Thereby increasing demand for goods and services, and as a result, inflation would rise further.
There is, however, another story parallel to this that paints a slightly different picture. Higher interest rates would also mean higher borrowing costs for producers who would then pass on these costs to consumers. In addition, as one of the primary costs in households, higher interest mortgage repayments to the bank’s would most definitely pinch pockets and increase the likelihood of a recession.
Though it’s true there’s no precedent that his theory will work and it does not appear to be garnering confidence amongst the Turkish people, there are a growing number of economists who are challenging the cardinal rule that inflation can be reduced by raising the interest rate and that it actually has the opposite effect.
“Those models also predict that raising interest rates will raise inflation, both in the long and short run. My attempts to escape this prediction by adding money, backwards-looking Phillips curves, multiple equilibria or Taylor rules all fail” John Howland Cochrane 2016 paper on ‘Do Higher Interest Rates Raise or Lower Inflation?’.
Another result of raising the interest rate is that the money supply contracts which also means there is less money to pay workers which in turn leads to unemployment. Despite growing inflation and what traditional wisdom dictates, the US and many of its allies have quietly acknowledged this reality by keeping its own interest rates low. You’d expect the US interest rate (0.25%) to match or at least be close to the inflation rate (6.8%), but no, they’ve kept it near zero despite persistent inflation growth, as the table here illustrates.
The question to ask then is; if both the US and Turkey are going against the conventional 'wisdom', why is it that the media is hanging Erdogan for a policy that is shared by their own government? It may be that the motivations behind their respective actions are different.
Erdogan is looking far into the future, imagining a world where banks don’t hold his country hostage. The banking institutions do not like that. So, they play their poli-tricks and secure an agenda, backed by government policies they help write, to quell any resistance to the control over nations they have established over the last 300 years.
‘Our country is now at a point that can break this trap, there is no turning back,” Erdogan said. ‘Turkey will not live in a trap of exchange rate, inflation and interest rates.”
Had Erdogan raised interest rates, jobs would be lost. Turkey's productive potential would then be capped and the long term goal of creating a producer economy compromised. Not only that, he would be criticised for the loss of jobs. What economists also ignore, is the question of what to do once inflation has tapered off and the economy has stabilised. Should Turkey, now in a recession, then have to borrow from the IMF to fund its current account deficit and be even more dependent on imports? Or should it focus on developing its export economy?
An interest rate rise will almost certainly cause a recession due to rising unemployment and artificially suppressed demand.
On the other hand, an interest rate reduction will see inflation continue to rise at least in the short term, which will reduce appetite for foreign direct investment and as a result may reduce production; why invest in a country if your investment will automatically depreciate by more than 36% within a year?
That being said, it is a double-edged sword. A loss in the lira’s value does hope to strengthen exports by making them cheaper as well as counteract this challenge by encouraging tourism — a significant contributor to Turkey's economic growth — increasing the Liras demand and helping to keep it stable. Erdogan has also said he wants to 'end reliance on short-term foreign capital that flows in when rates are high', you can make of that what you think, but it shows he isn’t oblivious to the potential ‘repercussions’ of his decisions as the media seems to suggest.
Another argument against decreasing the interest rate is that should inflation continue to rise, confidence in the Lira will deteriorate and subsequently Turkey will risk dollarisation of the economy, something Erdogan is eager to move away from. However, to counteract this, Erdogan announced on December 20 a savers account that at least temporarily moved the country out of currency checkmate. This multi-level chess action, saw the lira fall to an low of 18.40Tr per U.S. dollar , before recording a historic rebound on the same day hours after Erdogan announced the new scheme to protect lira deposits against currency volatility.
These challenges and trade-offs are not unique to Turkey and it’s up to each nation to decide for themselves which is the lesser of the two evils; immediate economic recession or a potential gradual decline into poverty at the hands of runaway inflation.
Which course Turkey should take has already been charted by Western governments. If you really think about it, by keeping their own rates close to zero they have to an extent also agreed that central bank Interest rates are simply a synthetic solution, a lever that has been used so often that it’s malfunctioning and reliability questioned even by some western economists. High or low, should we print more, or should we print less? They can’t seem to agree. For some countries, it works. For some, like Argentina, where inflation has hovered in the 50% region and interest rates close behind, it doesn’t. And so, the best way to summarise Erdogan's policy is that he is ignoring most of the artificial fluff and pursuing one of the few single truths. Money, wherever and whoever holds it, will always flow to those who produce goods and services. If you don't produce, money flows out and on a macro level and in economic terms, you suffer a trade deficit.
To illustrate this point further let us imagine the economy as a jug of juice.
Water, or credit (money printed by the banks), is poured into this jug. As a result, though the quantity of liquid has increased the quality of juice has gone down, leading to a reduction in taste or purchasing power (inflation). Now how can we increase the quality of the juice back to its original level?
There are two options. Either, remove the water that was poured in. This is the role that interest rates play, and just as hard as it is to do so in this example, separating the mixture and measuring the correct amount of water to withdraw, it is as hard or even more challenging in the economy — one of the reasons why it takes years for the economy to react to the interest rate changes. Contrary to what most people think, even if Erdogan increased interest rates, the situation will not magically change immediately. It is more so an issue of trust and confidence which can be regained.
There is however another option, which is to pour an equal amount of juice into the jug. In this example we've already established the water is money, and more money only succeeded in diluting the juice and decreasing its purchasing power. So what then is the juice? Juice represents value, otherwise known as goods and services produced by the economy and just like the banks are the only ones who can print money, the only ones capable of producing value are humans. In this analogy the power that the banks have to create money is far less than the power of people. They have the capacity to produce more and tilt the balance if they are able to remove the wool pulled over their eyes and recognise that real growth can only come from people, not artificial levers.
This is what Erdogan is championing. More juice, and activating real economic factors by advocating more jobs for people who are the real drivers of true value — if they employ their skills to real productive activity as Turkey is doing with its colourful and well-diversified economy — sophisticated in technology, defence and agriculture to name a few. This principled approach will no doubt lead Turkey to become an exporting economy that ships usury back to where it came from (refer back to the biblical analogy made at the start of this article).
What better assurance is there to those who follow the Islamic faith than acting upon the Prophet Muhammad’s advice and becoming a producing nation that is built on fair ethical economic practices?
‘The upper hand is better than the lower hand. The upper hand is one that gives, and the lower hand is one that takes.” Source: Ṣaḥīḥ al-Bukhārī 1429.
To conclude, we have already established that usury is detrimental to society and its harms far outweigh any benefit. Economics is a game of trade-offs. No matter which way you turn you’ll be faced with criticism. Long term policies are favourable to short term gains. The best option in my view is to keep this in mind and to follow strong fundamentals that are grounded in divine instruction and Prophetic advice. In the long term, these damages will be a distant memory and Turkey will enjoy huge dividends.
This article was written to challenge two points raised in the media.
‘‘Erdogan’s adherence to the Quran’s commandment prohibiting paying interest on money is destroying the lira’s value” Wall Street Journal
Underlying all of the social, environmental, political, spiritual, economic issues and instability — is an interest-based economy governed by a capitalist ideology. This is the crux of my argument — it is not just unfair but ignorant to claim the roots of the crisis are religious backed policies. Turkey is not in any shape or form an Islamic economy. All the problems it is experiencing are the result of the western unstable economic system that it, like the rest of the world, has been forced to adopt.
Given this fact, it is no longer so foolish when someone defies convention with what should be common sense. Even if the reason stated is simply a religious one. Islamic economics is slowly being introduced as a remedy to the ills created by the parasitic banking system. Many of the media companies are financed by the same financial institutions they protect, and so how can you trust their verdict on the trajectory of the Turkish economy, when they are paid handsomely to advance the narrative that we cannot exist without interest and that Islam should not blaspheme against the ‘divine’ free market. Their role has always been to fearmonger and divert attention away from the true causes of injustice.
The media in its offence provides Erdogan with a defence. Whilst western politicians are known to look for short term gains to boost their political standing, Erdogan is willing to sacrifice public opinion in pursuit of a long term result.
‘What we are doing is right. We have made and are making a politically risky but correct plan,” Erdoğan told the ruling Justice and Development Party’s (AK Party) lawmakers in Parliament in the capital Ankara.
Despite what the media has said over the last few years, Erdogan has presided over the strongest economic growth Turkey has seen. Almost immediately after assuming power he saved Turkey from the currency crisis in 2005 by pulling the then Turkish Lira from being the ‘most worthless currency in the world’ at a whopping $1 = 1,350,000 (one US dollar to one million three hundred and fifty thousand)Tr to just $1 = 9Tr , and his unconventional approach has paid off in other scenarios.
The last year has had its highs and lows. From records in exports and stock markets to the dual challenge of soaring inflation and a slide in the Turkish lira. Where it’s headed next for the rest of the world may be uncertain, Muslims do have that concern. We already know which economic policies inherently harm society and from the financial crises it is clear that old economic models have ceased to be relevant, yet it still dominates our thinking. Erdogan is becoming somewhat of a symbol for a new school of thought and despite widespread criticism, it is at least grounded in divine wisdom and a playbook that the Islamic world thrived off for nearly a thousand years, the impact of which has reverberated down through the ages to the device you are using now. That being said, I do not agree with all his policies and this will be discussed later.
‘Turkey’s Erdogan Blames Lira Slump on Attacks by Money Barons” Bloomberg
Another criticism directed at Erdogan is the claims of foreign interference. But are these claims completely baseless? Whether they are politically or economically motivated, speculators betting against the Lira have caused in my view also short-term damage to the Turkish economy by inspiring panic. Panic drives behaviour, and a market ruled by fear can destroy an economy. A scenario Britain is quite familiar with. Black Wednesday marks the date George Soros' bet against Britain and broke the Bank of England . If one of the world's greatest economies is susceptible to disruption by a single individual, what then for an economy a quarter of the size? Some say non-Turkish banks and traders hold no position on the Lira and therefore had no influence and contribution to its demise. There is evidence to show otherwise.
As mentioned before this is flawed on the basis that Turkey's economy is currently in no way Islamic. It is built on an interest-bearing banking system and uses fiat currency, which despite being a significant contributor to the Lira’s demise and in fact all currency crises, we have not even discussed. Though I believe the French philosopher Voltaire's comment and graphs illustrating the correlation between money supply, inflation and exchange rate should do the job:
‘Paper money eventually returns to its intrinsic value – zero.”
This is because when something that is used as medium of exchange is not backed by real value like gold, it can be produced at will. Which gives the opportunity for peculiar applications of the term ‘the more the merrier’ to start to gain traction as a justification for printing money. This new movement has coined the term monetary theory (MMT) and the basic principle is this, as long as you grow GDP faster than debt incurred, you can pay it back by increasing taxes. We know this debt based financing model and focus on GDP growth will drive the wrong incentives that will have long term implications. It is still yet a theory but one that is gaining popularity in light of the pandemic and like Erdogan’s policy is also unconventional, but acceptable nonetheless as it is grounded in ‘simple observations’ by esteemed economists.
The currency speculation discussed above is also forbidden in Islam, and so the volatility and uncertainty and pressure that the world suffers due to a few traders seeking to profit from the collapse of a company (ie; GameStop ) or nation (see short graph), would not occur. While economists, sociologists and politicians skate around the surface, Islam cuts through the Ice down to the heart of the issue and addresses the problem at its core. Without a debt & interest-based system and a fiat-based currency, none of these problems would even be possible.
Why then western economists discount wisdom that would save them all the trouble in the first place remains a mystery. Do they fear an archaic 1400-year-old book will be right and their fancy graphs and theories wrong? Or maybe the fact that such prohibitions would mean currency crusades can no longer be entertained as a pressuring tactic nor printing money and lending at interest as means to unnatural and unimaginable wealth.
The western developed world attributes its progress to its own ingenuity, conveniently ignoring the fact that the majority of its wealth was built and continues to be built off the back of slavery, colonialism and injustice.
“If the countries and companies that became rich by exploiting human flesh paid their debts, the world would be a radically different and fairer place’... the scientific, political and industrial revolutions the British school system is so proud to proclaim, were only possible because of the blood, toil and bounty exploited from the ‘darker nations” from across the globe” Professor Kehinde Andrews
The eastern developing world does not have such ‘luxuries’ and needs not to align itself with the trajectory of a society that has already painted a clear picture of where it will land. Namely, an inequitable world that promises only more injustice and oppression. It's not Erdogan's policy that has gone bust, rather, his policies threaten to bankrupt broken economic models that have dominated the world for too long. The media has done its best to manipulate the public against a president who is on a path to secure independence from the shackles of debt and servitude to the banking overlords that have robbed much of the world of nearly everything of meaning.
Whilst I believe Erdogan’s policies are a step in the right direction, reducing the interest rates will ironically increase the uptake of interest-bearing debts by making it cheaper to do so. Like the Prophet Muhammad (saw) followed Quranic commands to take a gradual approach to forbid alcohol , we should perhaps do the same with usury. Both are root causes for social and economic instability. Though I acknowledge that it is a gradual effort to zero, why not tackle usury practised at the fringes through regulation, on say for example credit cards, and slowly work backwards to the heart, the central bank interest rate? Starting at the heart of the problem in the midst of an uncertain and tricky climate will be sure to produce either a radical positive or negative outcome. If the Turkish people do not have the patience to wait for a positive result or the situation drastically deteriorates, the AKP party may lose the next election, and all the hard work to plant the seed, undone, and ripped out before it produces its fruits.
David Rosenberg , writer for the Israeli Haaretz newspaper, in his sarcastic analysis of the Turkish predicament commented.
‘Erdoğan’s dreams of closing the current account deficit and waving Western bankers goodbye, turning Turkey into an export powerhouse, and winning a thumping election victory in 2023 from grateful voters, is almost certainly not going to play out. And that’s because the economics behind them are faulty.”
That is one view. There is no evidence to suggest the economics won’t work as it has never really been done before. Economists have always sought to describe the indescribable and boldly attempted to predict the unpredictable – often as we’ve seen getting it terribly wrong. The economy is the aggregate of the activity of billions of people and influenced by forces seen and unseen, big and small, from local weather changes to global pandemics. There are simply too many variable factors that change constantly to make any forecast viable. Like business professors who are sometimes too engrossed in theories and far removed from the reality of the actual economy, they tend to suggest solutions they have no experience in implementing or simply just base it on belief. How they believe economies behave or how economies have behaved in the past, both are poor indicators of the future.
‘The only function of economic forecasting is to make astrology look respectable.” John Kenneth Galbraith.
This isn’t an attempt to disregard the economics discipline or slight its ambassadors, I’m in no position to do that. My point here is that not all the theories you hear work in reality, and often we mistake forecasts for facts, especially in a field such as economics. You should do your own research and interrogate the narratives you read. Under all the intellectual sparkle and jargon, economists are humans too. They are susceptible to bias and their motivation can be influenced as Joseph E. Stiglitz, an American economist, indicates in his commentary of the 2008 financial crisis.
‘The financial sector provides ample rewards for those who agree with them: lucrative consultancies, research grants, and the like. This raises a question: Could this have influenced some economists’ judgments?”
The success of Turkey's new economic policy will set a precedent that will serve as a model for all nations to follow and establish Islamic principles as a force of justice, not something to be afraid of and confined within the home. Ultimately, history favours the bold. If Erdogan's policies are guided by the right intention, those of us that are Muslims should especially welcome and support this effort. If you agree that interest is a virus to society, then you’d support the doctor who prescribes the right medication even if you do not agree with him politically. It is unreasonable to think and expect there won’t be any symptoms. Like the alcoholic who suffers withdrawal symptoms, in an effort to become sober, the Turkish economy will suffer. To kill this cancer that sits at the heart of every nation, growing uncontrollably and infecting anything and everything, will require effort and sacrifice. Even under the Prophet Muhammad’s (saw) leadership, the Muslims experienced recessions and economic hardship so severe they had to tie stones to their stomachs. What got them through this period was trust, conviction, and faith in the One who controls all wealth and has already destined the rizq (sustenance) that each and every one of us will enjoy.
‘… How often has a small party prevailed against a large party by the leave of Allah. Allah is with those who remain steadfast”.
Whilst it is easy to discount these intangible factors. How many a time did a smaller force overcome a significantly larger one? Superiority in strength, numbers or history of victory does not ensure success. Whatever the odds are, a strong strategy, pragmatism and the most crucial element, faith, has proven time and again that they are capable of defying the ‘laws’ of mathematics and reason. This shouldn’t come as a surprise. Who is it that has created these laws and legislated how to live in harmony with them? Just as a nation gripped with fear can bring down a nation, one with confidence and faith will attract support and inevitably rise.
I personally have strong faith in the Turkish people and it’s government, and believe like Erdogan, we must also dare to question conventional logic and the systems that are eroding the fabric of our society. Even if it outwardly appears to have stood the test of time and produced phenomenal economic and social results. It is all ultimately a clever illusion proven by the simple fact – If the banks were to call in all their debts, the modern world and all its glory would cease to exist.
Will be updated soon.