A power struggle between the elected and bankers ended with the firing of a central bank governor in Turkey this July.
What must have been a seismic event in banking was met with the media wagon moving very quickly to other matters, but history may well have a different view because of what followed so far.
The exercise of jurisdiction by the elected over the central bank was due to a dispute on the nature of interest rates, one of – if not the – most secret topic which FED says has the potential to lead to “political upheavals” if officially explained.
As it stands thus we can only guess what role interest rates play in our economic and monetary system, but Recep Erdogan, the Turkish president, has maintained since at least 2012 that interest rates cause inflation. “I am an economist,” he said.
In the midst of a recession due to lira’s plunging value following a political dispute between the US and Turkey, which led to some sanctions, the now fired central bank governor Murat Cetinkaya increased interest rates from 17.4% to 24%.
He claimed this was necessary to combat inflation, so keeping interest rates at 24% even as the economy was chocking and inflation was running amok.
Shortly after he was fired, the picture changed and quite drastically with matters looking a lot different in Turkey.
“After entering last summer with a current account deficit of $57.1 billion, the country posted a surplus of $4.4 billion as of July 2019. This is the highest year-on-year change ever for Turkey,” the finance minister said.
Interest rates were cut shortly after the governor was fired from 24% to around 19.75%.
They were cut further this September to 16.5%, contributing significantly to a considerable drop in inflation to just 9.26% from 25%.
Growth is also picking up somewhat, with officials now targeting a 5% growth rate by 2022. So does this show increasing interest rates does actually cause inflation?
This is just one data point we have analyzed and we have to wait and see what happens further, but logically the amount paid in interest must become central bank money which allows commercial banks to lend more so increasing the supply of money both in the short term and long term as we have detailed in depth.
That’s because the amount loaned is destroyed once it’s paid back, but the interest paid on it must become central bank money. So not all of the capital loaned is destroyed. What is destroyed is capital minus interest, with what remains becoming “real” money.
Interest Rates: Banks’ Private Taxation
Commercial banks literally print money, not central banks, with central banks being just the conductor of how much they can print.
So conceptually making this a private tax on the public, with banks able to command the same power as the government – if not more power – on the economy by the level of taxation they demand – interest rates – and by deciding the rate of money printing as well as for who – lending.
This lending practice is currently completely unregulated because they’re “private.” The chair of Barclays for example does not go in front of a parliamentary committee every quarter to explain how much they lent, to who, and why.
The closest to it in America is FED chair testifying before congress, but the FED chair is more a Pavlovian nudger through dopamine and punishment.
It is commercial banks that are making these government-like decisions on what business, for example, deserves to expand or not from completely out of thin air printed money which they lend to them, or lend not.
With such power they can raise a Kalkuttan orphan even to the presidency for if you are lent a billion, for example, it must take a lot for you to not become and remain immensely rich.
Yet this printing is not quite out of nothing. It is a tax on all of current value and future value, with these private banks so making public policy while lacking oversight or accountability in regards to their decisions of who they lend to and how much.
The effects of this distortion can be things like paying more in rent for an ordinary room in London than you’d pay on mortgage installments for an ordinary house in London because the bank will simply not lend you the money.
That rent here moreover is double private taxation because not only are you paying for something you’ll never own – so burning your money – but you’re also paying an inflated value because of this artificial constrain in housing supply due to banks not lending for it.
If the picture is expanded, this starts to look like a feudalistic system or aristocratic with maybe 100 or 1,000 people levying private taxation without any accountability or representation through legal privileges like an exclusive right to print money.
The alternative can of course be something like bitcoin, an unchangeable fixed amount of money. Or something like an unchangeable fixed interest rate of 2%, with the elected government then maestro-ing the circulation of money and its distribution through taxation, fines and licenses.
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