Thirty-seven months ago, I wrote about Turkey’s “unique” approach to fighting inflation. Under the leadership—read that as “autocracy”—of President Recep Tayyip Erdoğan, Turkey boldly ignored its central bank, its supreme court, the fiscal policies of the rest of the world, and generally anyone who had passed freshman economics. The government’s big idea? Lower interest rates to fight inflation.
Now, if my inbox is any indication, a few readers remain puzzled by why this policy was such a head-scratcher. Allow me to demonstrate.
Imagine you and your spouse are on Oceanic Flight 815 flying from San Francisco to Australia for vacation. Halfway there, the pilot announces that, due to a medical emergency, the plane must make an unscheduled stop on the tiny island of Dharma.
While waiting, the airline hands out five Dharman dollars to each of the 100 passengers to spend in the airport. There’s only one snack bar—naturally—and it sells hamburgers for $2 each. So, everyone heads there because, as we all know, the only place to get food better than at an airport is at a state prison.
But there’s a catch: The snack bar has only 50 burgers. The hungry crowd, determined not to gnaw on the armrests, starts bidding against one another. Soon the burgers go for $4, $5, and finally, four desperate travelers pool their money and offer $20 for two burgers. The burgers vanish faster than free donuts at a faculty meeting.
Voilà: inflation!—Too many dollars chasing too few goods. (Or, as Milton Friedman put it, “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.”)
President Erdoğan, however, disagreed. He argued that lowering interest rates would encourage businesses to borrow, expand production, and flood the market with so many goods that prices would fall from sheer embarrassment. It’s a lovely theory—sort of a fairy tale for macroeconomists—but it only works if inflation stems from a lack of supply caused by a recession. In our burger example, adding a second snack bar might indeed have solved the problem.
Unfortunately, Turkey’s real problem wasn’t a shortage of goods…It was a shortage of confidence. The Turkish lira was viewed as weak, and lowering interest rates made it weaker still. Investors dumped the lira for harder currencies, so import prices exploded and the cost of everything from wheat to washing machines soared. Instead of producing more goods cheaply, Turkish firms found themselves paying more for raw materials and trying to sell goods to customers who could no longer afford them.
In short, Erdoğan tried to cure roaring inflation by pouring gasoline on it—and then wondered why the cost of his fire insurance skyrocketed.
Turkey began its rate cuts in March, 2021, cutting the interest rate by 5% by the end of the year. Almost immediately, inflation began to soar, peaking at a 75% increase for 2023. The Turkish lira’s value fell sharply: for example, in 2021, the lira lost more than 40% of its value against the dollar after rate cuts and policy instability.
Wages couldn’t keep up. Even after multiple minimum-wage hikes, real purchasing power still fell by more than 20%. Everyday staples—bread, eggs, and vegetables—doubled or tripled in price within a single year. Rent in Istanbul rose 150–200% between 2021 and 2023. Pensioners and fixed-income households saw their savings evaporate; middle-class families began skipping meat, fuel, and medicine purchases.
As the lira lost 80% of its value compared to the US dollar, there was a rush to obtain either gold or foreign currency. By 2023, roughly two-thirds of all bank deposits were held in dollars or euros rather than lira. Interest paid on savings accounts was far below inflation, so even people who “saved” money were effectively losing value every month.
Mortgage and consumer-credit rates were kept artificially low, fueling a real-estate bubble. Developers built luxury flats denominated in foreign currency; as the lira collapsed, locals were priced out of the market. Millions of renters faced eviction or were forced to move into smaller flats; informal housing (a polite way of saying slums) expanded on city outskirts.
Official unemployment hovered around 9–10%, but under-employment and informal work surged. Small-business owners faced skyrocketing import costs for raw materials and energy, wiping out profit margins. Doctors, engineers, and young professionals—those who could afford to leave—emigrated in record numbers. An estimated 450,000 Turks left between 2021 and 2024, seeking economic stability abroad. While crowds queued for subsidized bread lines, municipalities set up “people’s markets” to sell basic foods below cost, forcing even more privately-owned stores into bankruptcy.
The average Turk endured a massive transfer of wealth from savers to borrowers, from the poor to the politically-connected, and from the middle class to exporters, who earned in foreign currency. Inflation didn’t just change prices—it reshaped lifestyles, savings habits, and social expectations.
One of the perks of being an autocrat is that you never have to admit you have been wrong. Officially, President Erdoğan still insists that he was right all along and that the rest of the planet simply misunderstands economics. After gliding to reelection in 2023 (no shock, since Turkey’s electoral playing field is about as flat as Dolly Parton) he quietly shuffled his cabinet, installed new economic ministers, and—without quite mentioning it—let interest rates climb.
While Turkey’s experiment in economic alchemy was spectacular, it’s hardly the only country to have tried sheer financial lunacy dressed up as innovation. History is littered with governments that decided the laws of economics were merely “guidelines.” Argentina, for instance, has spent decades proving that you really can default on the same debt more than once. (Something the current president, an economist, is finally correcting.)
Venezuela tried financing utopia with oil money and ended up discovering that printing currency faster than you can count it does not, in fact, create wealth. Even the United States, during the seventies, thought it could outlaw recessions by fixing wages and prices—an idea that lasted about as long as polyester suits and pet rocks.
Politicians everywhere seem to believe they can outwit arithmetic. Some imagine that if they just “stimulate demand,” prosperity will bloom like a spring flower. Others insist that cutting interest rates to zero will make productivity leap from sheer gratitude. None of them ever ask the grocery clerk what happens when money loses value faster than lettuce wilts.
So, while Erdoğan’s monetary adventures deserve a chapter in the textbook of terrible ideas, he’s in good company. Every nation, given enough hubris and a printing press, eventually convinces itself it has discovered the economic perpetual-motion machine. It never works, of course, but on the bright side, it gives economists something to write about—and provides comedians steady income.
In the 11th century, King Canute ruled England, Denmark, and Norway—a résumé impressive enough to make anyone’s courtiers a little sycophantic. When they began insisting that his royal power was limitless, Canute decided to make a point. He had his throne carried to the edge of the sea, sat down, and with due ceremony commanded the tide to retreat. Naturally, the water ignored him and soaked his royal ankles. Turning to his followers, the king declared that all earthly power is limited…even a monarch’s.
Over the centuries, the tale of Canute has been mangled beyond recognition so that, instead of a wise ruler teaching humility, he’s remembered as a pompous fool yelling at the surf. Yet modern politicians seem to have drawn an entirely different moral: no matter how preposterous your message, repeat it often enough and with enough confidence, and someone, somewhere, will believe the tide really will turn back.
