Tweet of the Day: Comparing Gollum with Politicians is a No-No

A Turkish doctor reportedly lost his job and face trial for comparing the Turkish leadership with 'Lord of the Rings' fictional character Gollum 

Image above and quote below from the New York Times:

A Turkish man’s freedom may hang on a question put to a panel of “Lord of the Rings” experts: Is Gollum evil?

More significantly, was it an insult to compare Turkey’s president to the slimy, bug-eyed creature from the films based on J.R.R. Tolkien’s trilogy?

A physician, Dr. Bilgin Ciftci, is accused of sharing a meme that juxtaposes Gollum, as played by Andy Serkis (and advanced digital effects), with Recep Tayyip Erdogan in several situations: while laughing, while surprised, while eating. Insulting the president is a crime under Turkish law.

The punishments were swift. Dr. Ciftci lost his job with the Public Health Institution of Turkey after sharing the meme, and he faces a two-year prison sentence, the Turkish newspaper Today’s Zaman reported. After a judge said he did not know enough about the Tolkien creature to make an appropriate decision, five experts were ordered to conduct an investigation into Gollum’s moral character before the next phase of the trial begins in February.

Turkey’s Central Banks Surprises With Huge Interest Rate Increases

Turkey’s central bank just made a stunning “shock and awe” move in order to calm her mercurial financial, particularly the currency market. The central bank substantially raised interest rates by 400-500 basis points

From Bloomberg:

Turkey’s central bank raised all its main interest rates at an emergency meeting, resisting political pressure and reversing years of policy, after the lira slid to a record low.

The bank in Ankara raised the benchmark one-week repo rate to 10 percent from 4.5 percent, according to a statement posted on its website at midnight. It also raised the overnight lending rate to 12 percent from 7.75 percent, and the overnight borrowing rate to 8 percent from 3.5 percent. The lira extended gains after the announcement, adding 3 percent to 2.18 per dollar at 1 a.m. in Istanbul.

Turkey is one of the supposed member of the emerging market Morgan Stanley coined “fragile 5”—along with Brazil, South Africa, India and Indonesia.

Some have cheered that Turkey’s central bank’s surprising move may have contained the emerging market contagion, but such optimists may be overlooking the possible impact of these rate increases on the real economy.

The central bank’s action has been meant to stabilize the Turkish lira which has been in a collapse mode vis-à-vis the US dollar.

This is the historical performance of Turkey’s interest rates. Like everywhere else, Turkey rates has been zero bound since 2008. Yet the recent rate hike is still far from the highs of the 2008 crisis

What has been the outcome of the zero bound rates?

Again like everywhere else, the short answer is a Credit Bubble.

Loans to the private sector spiraled to the firmament. Turkey’s credit backed spending spree has led to massive deficits in her trade and current account balances. This means that her lavish debt financed spending depended also on foreign money to plug these holes. This is another symptom of the Credit Bubble.

Moreover Turkey government continues to spend more than she collects thus sustaining a budget deficit.

And this gap has been financed by external borrowing which has leapt since 2010. External debt has grown by about 40% from the 2010 lows.

So zero bound rates promoted debt financed spending of the private sector and of the government which had been funded by banks and by foreign money. 

This is very interesting because there are about $160+ billion short term external debt due this year according to Turkey’s Central Bank, mostly held by private banks and by the other sectors.

And the other concern is of the external financing requirements excluding short term debt.

Another point of concern is of the $350 billion worth of foreign banking exposure on Turkey. Should there be any default/s will these foreign banks not be affected?

Interesting no?

Some questions

Will the current shock and awe be enough to stabilize Turkey’s financial system? Or will this just have a short term effect, where the current hike could be the first of the series of many more rate hikes to come?

How will the current dramatic rate hike impact the real economy (private sector and the government)? Importantly how will the current interest policy affect Turkey’s government and the private sector’s capacity to service debt? 

The markets have already been pricing in higher probability of Turkey’s debt default via higher CDS spreads

Mind you, for all those singing hosannas that forex reserves serve as talisman from a crisis, so far Turkey’s massive record foreign exchange reserves has done little to contain the financial upheaval.

It’s very interesting because Turkey could function as a paradigm to a possible crisis contagion or ‘domino effect’ in emerging markets.

It's even more interesting for Emerging Markets and for Asia to pray that the US Federal Reserve, whom are meeting today, won't add to their woes by increasing the "taper" 

More Signs of the End of Easy Money: Following Brazil, the Indian Government Raises Interest Rates

The return of the bond vigilantes has prompted the Brazilian government to  set the trend of hiking interest rates, now it seems as India’s turn.

From Businessweek-Bloomberg:

India stepped up efforts to help the rupee after its plunge to a record low, raising two interest rates in a move that escalates a tightening in liquidity across most of the biggest emerging markets.

The central bank announced the decision late yesterday after Governor Duvvuri Subbarao earlier in the day canceled a speech to meet the finance minister. The RBI raised two money-market rates by 2 percentage points and plans to drain 120 billion rupees ($2 billion) through bond purchases.

Indian rupee forwards jumped the most in 10 months, and the RBI’s move yesterday left Russia as the only BRIC economy to not have reined in funds in its financial system. Brazil has raised its benchmark rates three times this year and a cash squeeze in China sent interbank borrowing costs soaring to records last month.

Media recently cheered on the one month contraction from record trade deficits largely due to gold import and trade curbs.

Yet if the rupee-US dollar exchange ratio continues to decline or if the USD-rupee persist to ascend as shown above, then statistical data may not reflect on the real state of affairs.

Gold restriction mandates have only been diverting India’s gold trade underground. Gold smuggling has massively risen, partly channeled through Nepal. 

Decline in India’s rupee has equally been reflected on consumer price inflation which increased to a three month high.

A curious mind would ask why, given India’s relatively low inflation and interest rate levels, has these been prompting alarm on Indian authorities for them to act to tighten?

Well, the obvious answer is that today’s systemic debt have reached epic proportions as shown by domestic credit % to the economy.

It’s not just domestic debt but also India's external debt has sharply risen to record highs.

All these has made India’s economy and financial system highly vulnerable to interest rate increases. (above charts from tradingeconomics.com)

But these governments sees the risks in the currency spectrum as potential tinderboxes for a crisis, and thus opt for the interest rate medium to effect policy changes.

As I have been pointing out, one cannot just compare with past data in analyzing economic events, that’s because, there are multitude of changes happening real time. 

So what may seem as relatively “low” interest rates and “low” consumer price inflation today, may be “high” relative to the changes in the debt position.

Nonetheless, theoretically the bigger the debt, the more sensitive debt conditions are to interest rate increases, which likewise implies of the amplification of credit risks.

So far India’s stock market, represented by the BSE 30, after falling 9% in reaction to “tapering” fears, from the May’s peak, appears to be challenging the record highs. Dr. Bernanke’s "put" has put an oomph to the latest rally. 

In contrast, stock markets of Brazil, China and Russia continues to flounder.

Also I pointed out that Turkey's officials previously announced measures to use record foreign currency reserves to combat the bond vigilantes, they seem to have a change of heart, after the initial forex measures, as predicted, have apparently failed to stanch the decline of the lira. 

Now, Turkish monetary officials are contemplating to likewise tighten via the interest rate channel.

Brazil and India’s tightening, brought about by the return of the bond vigilantes, which will likely to be a trend for many more emerging markets as Turkey and Indonesia and possibly too on developed economies, are deepening signs of the transition from easy money to the tight money. 

It would be reckless to ignore the risks of disorderly market adjustments should bond vigilantes continue to run berserk.

War on Gold: India’s Smuggling Soars, Vietnam Charges Fees on Deposits, Turkey’s Gold Deposits

What happens when governments think that they can legislate away people’s preferred activities? Well, the obvious outcome has been to shift such activities underground. This applies to social activities like vices e.g. gambling, drugs, alcohol and etc..., security (e.g. guns) or even to money (via gold ownership).

In the case of the Indian government which has recently slapped higher import taxes on gold, the consequence has been that of the explosion of gold smuggling.

Notes the Mineweb: (bold mine)

Cases of smuggled gold entering India are coming in thick and fast. Almost as fast as gold coins and jewellery pieces are flying off retail shelves…

Despite India's best efforts to curb illegal gold imports, which included a boost to the nation's customs in 2012, gold smuggling has been rather rampant.

According to the All India Gems and Jewellery Trade Federation, India imported 950 tonnes in 2012. Of this, 250 tonne has come into the country through the illegal channel.

``In 2011, India imported over 900 tonnes of gold and none of it came through smuggling. The hike in customs duty has not stopped the import of gold into the country. It has only changed the route as smugglers earn a profit of around $3,719 (Rs 200,000) on every kilogram of gold smuggled into the country,'' said Federation Chairman Bachhraj Bamalwa.

The duty rate hike has not dampened demand, it has just enhanced the profit margin of smugglers, he added.

Finance ministry data shows $175 million (Rs 9.4 billion) worth of gold was seized from more than 200 cases of smuggling during April to July 2012. This was a 272% rise from the level of the previous year. Moreover, between 2006-07 and 2010-11, gold seizure was almost nil, data from the directorate of revenue intelligence shows.

In the first 10 months of 2012-13, India's Directorate of Revenue Intelligence seized gold worth $11 million (Rs 601 million) which is some 200kgs at the current price, and cracked 36 cases of smuggling.

The Directorate of Revenue Intelligence is an agency that monitors economic offences. Officers said the incidence of gold smuggling in the current fiscal year has grown by more than eight times as compared to the corresponding period in the previous year.

They added that spot gold prices in India are 5.7% higher than in Dubai. Typically, gold is smuggled into India from neighbouring Dubai and Thailand.

So the implicit gold prohibition via taxation has only been rewarding the smugglers (who are most likely the politically connected), but failing in its goal to “dampen demand”. Talk about policy failure. 

Besides even the relatively higher prices which the average Indians pay for has not curtailed demand.

The Indian government’s war on gold has been premised on all sorts of red herring. They blame gold for contributing to trade deficits, in as much as, supposed risks posed by gold to the banking system. 

For instance for countries who carry cultural affinity for gold, the Business Insider notes that “where gold is a popular investment, those financial institutions which carry large gold deposits, lend cash against gold or offer interest-bearing gold deposit accounts, can pose a risk to the financial system if commodity prices suddenly shift.”

This simply hasn’t been true.

The reality is that the war on gold is about passing the blame on people for what truly has been about government profligacy and policy failure. This has been the case with India which I pointed out in the past.

Aside from cultural legacy, the average Indians value gold for as hedge against currency debasement, again from the Business Insider

Many Indians use gold to hedge investments against inflation. But a working group convened by India’s central bank recently advocated a range of alternative investment products which could be used by the public as an alternative to gold for inflation hedging. Gold-linked savings accounts, bonds and certificates that entitle a holder to physical gold could help reduce demand and quickly move more liquid assets into the country’s banking system, the group suggested.

Gold priced in rupee has skyrocketed by 115x from about 800 INR in 1973 to 93k INR in 2013. (chart from gold.org). The realization of such collapse in real currency value makes the average Indians want to own gold for savings.

However the Indian government essentially wants to arbitrarily transfer people’s savings to the government, channeled through inflation, from which the average Indians have balked at. And so the rampant smuggling.

The same dynamic applies to Vietnam

From the same Business insider article (bold mine)

Vietnam’s government is trying to tackle a similar problem through aggressive intervention in the local gold market. More than 31 percent of Vietnamese households keep some of the shiny stuff on hand, according to a survey by a government finance committee cited in a recent Credit Suisse note. High inflation levels and a weakening Vietnamese currency have made Vietnamese investors even more eager to snap up gold.

The Vietnamese government has intervened to mitigate the resulting spread between local and international gold prices. After temporarily suspending interest-bearing gold deposit accounts and certificates in 2011, the government has told banks and credit facilities to phase out gold deposits and loans for good. The government has also taken over the country’s largest gold refinery, and the State Bank of Vietnam is rolling out a new set of licenses allowing traders to buy and sell gold bars only if they meet strict requirements.

As noted above, the Vietnam government’s attack on gold not only has forced the banking system to charge fees on gold deposits but importantly has used gold as an instrument for controlling banks.

As Kel Kelly at the Mises Canada notes, (chart above his, italics original)

Recently, however, the government-run Vietnamese central bank disallowed loans in gold. Now, it is preventing banks from paying interest to customers on their gold. Instead, it is forcing banks to charge customer to store their gold, and requiring banks to regularly report on their transactions with account holders.

What’s happening is that the government wants to prevent citizens from using alternatives to its own quickly devaluing currency. This, way, the government can continue to steal purchasing power from its citizens through inflation.

Taxing the citizenry for holding gold has been just one approach. The other more conciliatory approach has been to migrate the gold held by the households to the government controlled banking system for the banks to use them.

Notes the Mineweb: (bold mine)

"Gold-based deposit accounts [in Turkey] surged 15% this year through the end of July," explained BusinessWeek back in October, "three times the increase in standard savings accounts."

"Although much criticised for its use of 'unconventional measures'," the Financial Times added in December, "few would argue that the decision last year by Turkey's central bank to allow the country’s banks to buy gold was anything less than a roaring success."

Buying gold isn't quite right. Starting in October 2011, the central bank began allowing commercial banks to hold a portion of their "required reserves" – needed to reassure depositors and other creditors they had plenty of money to hand – in physical gold bullion. Starting at 10%, that proportion was then raised to 30%.

Private citizens were similarly encouraged to hold their gold on deposit with their banks. That gold was thus transferred to the central bank's balance sheet. Et voila! Privately-owned gold now backed the nation's finances. A smart idea, which has coincided with Turkey's currency rising, interest rates falling, huge current-account shrinking, and government bonds regaining "investment grade" status.

Publicly targeting some of Turkey's estimated 2,200 tonnes of "under-the-pillow" gold, currently worth some $119 billion, the CBRT's governor Erdem Basci has meantime been awarded The Banker magazine's prestigious "Central Banker of the Year 2012" award.

Turkey’s government may be more successful in trying to take advantage of people preference for gold by synthesizing gold with banks through gold deposits, relative to the  antagonistic approach by India and Vietnam. 

Yet Turkey's accommodation may be linked to her gas-for-gold trade with Iran where the latter have been slapped by an economic embargo by the US along with her allies.

But Turkey’s gold integration with the banking system can be seen with suspicion. Banks who currently hold gold deposits may become agents of confiscation in the future when the government would have a change of heart.

The US did so in April 5, 1933 via Executive Order 6102 signed by then US President Franklin Delano Roosevelt

The bottom line is that governments disdain competition particularly with money, such that they will resort to taxation or outright confiscation. But all these will not stop people from protecting their savings through hard currencies such as gold.

Possible Complications from Turkey-Syria Clash

Politicians easily indulge in war without understanding the possible complications from their actions.

Turkey’s recent border clashes with Syria risks opening open of the old wounds which could further sow fissures and destabilize the region. The skirmishes could be used as casus belli or a prelude to a broader theater of conflict which includes the US and Israel.

Historian Eric Margolis explains,  

Turkey's neighborly love-fest ended soon after Syria erupted in civil war. For reasons that still remain murky, Erdogan dropped his "love-thy-neighbor"policy and began actively supporting Syria's insurgents.

Until the Syrian uprising, Turkey had enjoyed good trade and political relations with Damascus. Syria had more or less dropped its claims to Turkish-ruled Hatay province, and told its Kurdish minority not to make trouble for the Turks. Hatay, and its strategic port of Iskenderun, were part of historic Syria (as was Lebanon and Palestine), but passed with French help to Turkish rule in the last century. If relations between Ankara and Damascus continue to worsen, this thorny issue may again heat up.

Turkey blundered into Syria's civil war soon after it erupted in March, 2011. Ankara allowed Syrian insurgent groups, funded and armed by Saudi Arabia, France, Britain, the US and Qatar, to operate from its soil. CIA established an important logistics and communications base for the insurgents at the US air base at Incirlik, Turkey. US, British and French special forces based in Turkey discreetly joined in the war to overthrow the Assad regime in Damascus – all part of Washington's undeclared but very real and intensifying multi-dimensional war against Iran, Syria's closest ally.

Each passing day of Syria's brutal civil war raises the risk that Turkey will send its armed forces into Syria, either to create so-called "civilian corridors"or no-fly zones to ground the Assad regime's air force. All-out NATO intervention led by the US could occur after American presidential elections.

Meanwhile, the besieged Assad regime in Damascus has lost control of a northern border region inhabited by 2 million ethnic Kurds who have become autonomous. Ankara, which faces a virtual independent Kurdish state in northern Iraq and its own long-simmering uprising by its Kurdish minority, is deeply alarmed by the specter of Kurdish nationalism.

The war in Syria has accentuated Turkey's serious Kurdish problem. This writer covered the Turkish – Kurdish conflict in eastern Anatolia a decade ago, in which over 40,000 had died by 1992 alone. Turkey thought it had put an end to the Kurdish PKK insurgency by capturing its leader, Abdullah Ocalan, in 1999. The PKK's main base was in Syria.

Ocalan remains in prison. But the Kurdish independence movement has sprung again to life. Syria will very likely resume aiding Kurdish PKK fighters to exact revenge on Turkey for abetting anti-regime guerillas. This is a huge problem for Turkey as Kurds make up 15-20% of its population.

By fueling Syria's civil war, Erdogan has kicked the Kurdish hornet's nest.

The conflict in Syria is pitting its minority Alawites (an offshoot of Shia Islam), who dominate the Assad regime, against the long-repressed Sunni majority. As Syria's Alawites fight for what some believe is their lives, their struggle is reverberating in Lebanon, where Shiites make up the largest religious community. Turkey's long-marginalized Alevis, who are another distant offshoot of Shia Islam and close to Syria's Alawis, and who are looked down on by the Sunni majority as heretics, are also feeling the reverberations of the Syrian conflict. Alevis may make up as much as 15% of Turkey's population of some 74 million.

Recent revelations of a massacre of Alevis in 1938 at the end of the era of Turkish strongman Ataturk has inflamed Alevi emotions in Turkey and deepened their sense of persecution and historic injustice.

So the Syrian conflict is reopening some of the deep fissures in Turkey's body politics just at a time when its zesty economy was enjoying a 7% growth rate – not far from China's – and Turkey had become the Mideast's cock of the walk.

Now, Syria bodes ill for all involved.

Read the rest here.  

If domestic political situation in Turkey deteriorates due to its present belligerent acts against Syria, then it is not that history repeats itself, but rather the impetuous acts by politicians reignites hostile relationships which had been long buried in the past.

As Prof Joseph Salernon points out, 

As a human endeavor like any other, war making is the product of reason, purpose and choice.