The Breakdown - When Currencies Fail: ‘Bitcoin’ Google Searches in Turkey Rise 400% as Lira Crashes

Episode Date: March 23, 2021

Today on the Brief: Nigeria central bank reversing stance on crypto ban?  “The least responsible fiscal policy of the last 40 years” Scaramucci’s firm files fifth bitcoin ETF application Our main discussion: the crash of the Turkish lira. In this episode, NLW looks at the last few years of Turkish monetary policy, inflation and currency crisis, focusing on: The seesaw shifts between inflation and crisis on the one hand and interest rate hikes on the other The sour legacy of intervention in the central bank by President Erdogan  Why the Turkish lira had actually increased 3.07% against the dollar in 2021 before this  Finally, he examines why some think the only tool left in the Turkish central bank’s tool kit to fight inflation is currency controls, and why this is driving people to explore bitcoin as an escape valve.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

One of the remarkable things about this moment isn't that Bitcoin and digital assets are going to save everyone from the follies of local currency regimes. What's remarkable is that for the first time ever in the entire span of human history, there is a convenient, easy, permissionless off-ramp from those regimes for those people who have the technical know-how to do it. The number of people who have that know-how is an ever-expanding group, and that means that Bitcoin and digital assets add an X factor to every single currency crisis from here on out. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Casper, and Exodus, and produced and distributed by CoinDes.

What's going on, guys? It is Monday, March 22nd. Today we are discussing when currencies fail, Bitcoin Google searches in Turkey quadruple as the lira crashes. First up, however, let's do the brief. Is Nigeria backing down from their crypto ban? The Central Bank of Nigeria has issued a clarifying statement. A couple weeks ago, they came out with a statement basically saying, hey guys, look, cryptocurrencies have been banned for the last three years. Banks, you have to stop servicing the people with crypto accounts.

This clarifying statement, however, said that they had never in fact. banned cryptos and indeed had never even discouraged people from trading them. Instead, quote, what we have just done was to prohibit transactions on cryptocurrencies in the banking sector. So they're trying to say that this was specifically about a replacement, I think, for the Naira in financial transactions. That's what they had prohibited. This Nigeria situation has been really interesting to watch as many in Parliament reacted not positively to the CBN's new ban or new band talk, but instead called for them to come and testify before Parliament. At issue was the number of Nigerian youth who see crypto as a means to economic opportunity,

and this could be an example of the force of youth in particular for driving policy shifts, or at least, as it seems, reinterpretations. Speaking of policy, are we in the least responsible fiscal policy in 40 years? That's what Larry Summers had to say about the Biden administration stimulus, and really everything else going on economically right now. Larry Summers is a former Treasury Secretary, former Dean of Harvard, and he pointed at both Dems and Republicans as at fault. Quote, it's fundamentally driven by intransigence on the Democratic left and intransigence in the completely irresponsible behavior in the whole of the Republican Party. He said there is a one-and-three

chance that inflation will accelerate. He also said that there's a one-and-three chance that the Fed would hit the brakes and push the economy to a recession. His final one-and-three possibility is that the Fed and treasury will get the rapid growth they're looking for without inflation. Now, even if you agree with him, Summers is A, in the words of one former professor of mine, one of the world's galactic douches, and B, super salty that he was looked over for any key administration role. However, he has the relationships and reputation to get on TV whenever he wants to because of mainstream financial media, so there is a big grain of salt here. Third, Scaramucci and the fifth live Bitcoin ETF application. First Trust Advisors and Skybridge Capital, which is the hedge fund run by former

White House comms director and recent Bitcoin booster Anthony Scaramucci, aka A.k.a. The mooch, has filed a Bitcoin ETF proposal. This follows Wisdom Tree, Nidig, Valky, and Van Eck, and Van Eck, is currently in its 45-day open review period. In an interview last week, Scaramucci said the increase in the money supply was a, quote, silent tax on American savers. He also said that, companies are going to have to look at assets like Bitcoin for their treasury, quote, a responsible CFO or responsible treasurer will have to think about other assets to hold as a potential store of value for their companies. He also said that Bitcoin has the potential to, quote, start to standardize money again and that will be better for the working poor in the

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Visit the App Store or Google. Google Play to download or visit exodus.com for more information. With that, however, let's move to our main discussion, and there are really two parts of the story that we're going to cover. The first is the devastating crash of the Turkish Lira, the second is the response of people in that country who found their money worth dramatically less than it was just a few days before. First of all, what happened? Between Sunday evening and Monday, the Turkish Lira fell as much as 17% against the dollar, ultimately landing around 10% down. Turkish stocks also crashed. The benchmark Borsa Istanbul 100 stock index was down as much as 9.4%,

which was the biggest sell-off since June 2013. The NASDAQ listed I-Share's MSCI Turkey ETF fell 17.5% pre-market in the U.S. The cause of all this? On early Saturday morning, Turkish President Erdogan unexpectedly fired Nasi Agbal, the central bank governor who had been appointed in November. At the center of their disagreement was how to approach inflation. So let's step back and actually look at the scenario inherited by Agbal. He was the third central bank governor in two years. In November, the year that he came to power, the annual inflation rate was 14.03% according to the Turkish Statistical Institute. By December, it was up to 14.6%. Now, these are just official numbers, and some argue that it's actually much higher. On November 12th, 2020, John Hopkins economist Steve Hankey tweeted, every day I accurately measure inflation in Turkey.

Today I measure it at 35.61% this year, as opposed to the official number of 11.89%. And after that 14.6% number came out in December, he said that it was actually 25.85% per year. Even holding that aside, if you just take the official number, nearly 15% inflation a year is staggering. That means a halving of your purchasing power every five years. And this has been going on for a long time. Sue from Three Arrow's Capital tweeted last night, fun fact, the reason Turkish lira is TRI and not TRL is because they've already redenominated before due to massive hyperinflation. Let's add a little more color than about the previous year and a half. The central bank had been keeping interest rates low, or at least below consumer inflation.

And as we've discussed before on this show, negative real rates mean investors are discouraged from holding that sovereign debt, as well as from holding lira or lira denominated assets. These had been the policies for 18 months or more, and by fall, the currency was at all-time lows. Added to this fire was the way the Turkish Central Bank had been trying to prop up the lira, selling more than $100 billion in U.S. foreign reserves in order to keep the lira from completely cratering. In the process, this destroyed and depleted their foreign exchange reserves and led them to actually owing more dollars to Turkish banks than the central bank actually had. Indeed, Turkish opposition leaders asked for a judicial probe into the official reserves. As of November, the country looked to be heading to a full-on balance of payments crisis.

And on top of this, there have been major questions around the independence of the central bank from President Erdogan. Erdogan had frequently given the central bank direct monetary policy instructions and had dismissed two governors in the previous 16 months. Effectively, when we really take a step back, Turkey has been on this seesaw between currency crisis and inflation on the one hand. hand, and massive austerity and growth-solowing interest rate hikes on the other. A currency crisis in 2018 led to increased interest rates, and by summer of the next year, Erdogan appoints, quote, a friend to cut rates. By mid-November, when Agbaal came in, it was a swing back to the interest rate hikes and austerity side of the pendulum. The first act of Agbal as he came in was to immediately raise the central bank's one-week repo rate, which is an interbank lending rate,

from 10.25% to 15%. Now, interestingly, this had started to work. Things were looking more positive from a currency perspective, at least in early 2021. Daniel LaCalle tweeted this morning, the Turkey Central Bank helped make Lira one of the best currencies versus the USD in 2021 by curbing money supply growth via rate hikes helping reduce inflation. The Turkish lira was up 3.07% from December 31st, 2020 to March 19, 2021. It had been down 20% the year before.

It also saw something like 14 to 20 billion of foreign fund inflows into Turkish assets over that same period, which reversed years of the opposite direction. Basically, the interest rate hikes and austerity were performing well in the context of global currency markets. But Agbal clearly didn't believe inflation was getting under control to the degree that he wanted to. He raised rates again to 17%, and then finally, on the Thursday before his dismissal, raise them much more than expected to a full 19%. And so the pendulum is swinging back again from interest rate hikes and towards, at least in the minds of investors, runaway inflation. The newly appointed Governor Sahap Kavsyoglu said that beating inflation is the bank's main objective,

but also said that they're committed to lowering borrowing costs and bolstering growth. Money managers basically think he's going to be forced to lower interest rates and accept currency depreciation. And indeed, the other place that this is showing up is in the cost of ensuring Turkey's government debt against default, the price of which rose more than 50% over the weekend. What's more, this move and the switch from Agbal to Kavsioglu super reinforces the narrative that central banks lack independence from Erdogan as well. Kavsioglu is a party loyalist. Bloomberg's chief emerging markets economists said, quote, the hit to the central

bank's credibility and independence can't be overstated. Erdogan has battered the institutions with interventions that have repeatedly backfired. Financial markets were willing to give Agbal a chance. His successor will find it hard to build that trust again. So let's talk now about the other dimension to this that you might have caught if you were on Twitter. Google searches for the term Bitcoin in Turkey more than quadrupled over the weekend after Agbal's sacking. Why is that happening? Well, one part of it may be the idea that Bitcoin provides an inflation hedge and just a different currency to get away from lira volatility, which, by the way, lull at using Bitcoin to get away from volatility. What they don't tell you when they're trying to critique Bitcoin

is that people can stomach more volatility if there's some possibility that those 17% swings are also to the upside as well. But the other part of it is that, as I mentioned, the new governor has said that they're committed to fighting inflation, but doesn't want interest rates to be the tool because they mess with growth. What are there other tools then? Bing, Bing, Bing. capital controls, restricting the flows of capital out of lira and lira-denominated assets. So one question might be alongside Google searches is, are we seeing an increase in exchange activity? Owner Guzepec, a consultant at the BTC Turk Pro Exchange, said that there was a spike in volume and that it was for both USDT, tether as an alternative to US dollars, and Bitcoin.

On BTC Turk, the Bitcoin-Turk-Turk-Turkish-Lera pair has the highest volume, with the tether Turkish Lirapaird being the second highest. Now, this situation is going to evolve a lot. And I think on the one hand, you have to just be heartbroken for the Turkish people who are stuck between the whims and machinations of politicians and global economic flows that they have no control over. When it comes to how much this new set of crypto and digital assets can actually help them escape from those pains, I've said numerous times that one of the remarkable things about this moment isn't that Bitcoin and digital assets are going to save everyone from the follies of local currency regimes. That's just not realistic yet.

What's remarkable is that for the first time ever in the entire span of human history, there is a convenient, easy, permissionless off-ramp from those regimes for those people who have the technical know-how to do it. The number of people who have that know-how is an ever-expanding group, and that means that Bitcoin and digital assets add an X-factor to every single currency. crisis from here on out. You know I'm going to continue to watch this Turkish situation extremely closely, and I hope you'll hang out with me as we do. Until tomorrow, guys, be safe and take care of each other. Peace.