Un-eco­nomics 101

Dünya Executive - - FINANCIAL CORNER -

To put it col­lo­qui­ally what is nowa­days “in the air” goes like this: in­ter­est rates can be kept as low as pos­si­ble if only some­body so wishes. The­o­ret­i­cally, this ei­ther im­plies the rate of in­ter­est is al­ways fully ex­oge­nous –and this is the good part- or it shouldn’t even ex­ist –this is the weird part.

For in­stance, there may be times, such as in 1933 Ber­lin, when the watch­dog might claim that rates shouldn’t ex­ceed a cer­tain up­per bound, and banks would fol­low suit. This can only hap­pen of course if all other prices are also kept quasi-con­stant.

Here the claim is rather dif­fer­ent. Be­cause peo­ple can’t come up with other ideas, the only mech­a­nism growth is pur­ported to be re­stored is via the credit chan­nel, to which pub­lic ex­pen­di­tures might be ap­pended as an addendum. And the only growth en­gines peo­ple can imag­ine are con­struc­tion and au­to­mo­tive. These are rem­i­nis­cent of 1930s; there is noth­ing new in them.

Per­sonal and ve­hi­cle loan rates are still high, which sug­gests the CBRT pol­icy rate will be cut fur­ther so they fall too. Well, I don’t know much but pos­si­bly this is the best way to ren­der the Lira vul­ner­a­ble to shocks even more than it al­ready is.

The main con­jec­ture, without con­sid­er­ing its con­se­quences, lie in the loans-to-de­posits graphic. Loan growth has fallen so dras­ti­cally that it is even below de­posit growth. Go­ing hand in hand with de­posits could be ac­cepted be­cause over­seas fund­ing was scarce and ex­pen­sive last year, so the con­jec­ture goes, but fall­ing be­hind de­posits can’t be ac­cepted.

True, but there is also the fact that de­mand fell dras­ti­cally first, and then loan growth nose­dived, not vice versa. This is the causal­ity chain in this econ­omy, not the other way around.

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