GeneralDollar as an intervention tool

2021-05-08 13:05

The main condition of being a popular economist in Turkey is to predict in which direction the dollar index will move. These "economists" often claiming that the country's economy is failed when the dollar gains value against Turkish Lira for dollar review. But when look at the dollar review and  the dollar loses value, instead of being happy, they make predictions saying "The dollar will be more valuable, look, you’ll see" as if the depreciation of the dollar is good for an economy as the dollar prediction.

Exactly; As the dollar's appreciation is beneficial or harmful, lowering the dollar has the same effect. In addition, what this effect will be in both cases is directly related to the macro and micro indicators of the relevant country's economy within the list of the dollar predicton. While talking about macro indicators, topics such as inflation, employment or GDP, product sales or agricultural production should be addressed in micro indicators.

In short, dozens of indicators are used in order to have an idea about the economic progress in a country as the dollar review. The dollar index, the value of the dollar against TL is not only one of these indicators and is not among the most important ones.

All of them have an impact on the general course of the economy in proportion to their weight except all the dollar review. And they interact with each other directly or indirectly. In other words, the change in one of them affects the other.

How much does the dollar index tell us about a country's economy?

We have mentioned above that the dollar index is only one of the tens of indicators that can be applied to form an opinion on an economy, but it is not the most important one for the dollar review.

For example, while 1 dollar equals 8.3 liras, it corresponds to 106 Japanese Yen. With a simple calculation, 1 Turkish lira equals approximately 15 Japanese Yen. But this does not mean that Turkey's economy is better than Japan's.

What are the consequences of the dollar's appreciation or lowering the dollar?

In addition, whether lowering the dollar and the dollar’s fall has a positive or negative effect on an economy is directly related to other indicators. Let's explain by giving an example again for the dollar review: For an economy with a high export potential, the depreciation of the dollar means that the goods of that country to become more expensive, thus decreasing its exports, production and investments and consequently to increase unemployment.

There are many examples of this situation in history to understand the dollar review. Dutch Disease is one of the strongest examples of how the Dutch currency, which is valued against the dollar index, has caused major problems in the country's economy. The Dutch currency before the euro was fluorine. When Florin had gained considerable value against world currencies, thus the Dutch imports whatever they need from the United States, Germany and Italy, instead of producing domestically with their precious money. Forexample; While one chair can be bought in the Netherlands with 100 florins, 4 in Germany and 7 in Italy can be bought with the same amount. As a result of lowering dollar, production gradually decreased, investments stopped and unemployment increased in the Netherlands. And this economic crisis called Dutch Disease joined the world economics literature.

This may sound very strange as Turkey has not experienced such a situation, but this is the truth. The appreciation of the dollar index, or in other words, the depreciation of the TL causes Turkish goods to become cheaper and exports to increase. More exports, more production, more production means more investment, more investment means more employment.

Why does all the goods in the market become expensive when the value of dollar index rises?

Here the situation is a little different; Normally, the dollar index increase will have a limited effect on the commodities in the market. That limit is this for the dollar review; The dollar inputs in the production of that good affect the percentage of what they are. But in Turkey, consequences develops as follows; Opportunistic market players realize an increase over the total retail product price at the rate of an increase in the currency. Not only that, when the value of the dollar drops, prices are not restored.

It would be more clear to explain it through an example

In 2018, the retail price of carboy water is 9 TL. Then, in August of the same year, after a political crisis between Turkey and the USA, there was a currency attack and the dollar index increased from 4.60 to 7, gaining value against TL about 50%.

After this exchange rate increase, the price of 19-liter carboy water suddenly became 13 lira. The water; It is in the nature, originating from fountain, so it is not like manufacturing or producing some goods. Water filling facilities work with full automation, 3 or 5 people are already working in the facilities. Dividing the salaries of these 3-5 people into millions of bottles, there is a very low unit cost. The electricity used is also very small in amount per production. Delivery costs; a 10-wheel truck takes about 1000-1200 carboy. As the water producers have their own trucks, there is a rough calculation of 1500 lira round trip (including the cost of the driver).

In other words, a bottle sold for 9 TL should have received a dollar index effect on the cost corresponding to 2 TL; 50% of 2 liras equals 1 lira, 9 TL plus 1 lira equals 10 lira. But opportunistic market player manipulates the price of a carboy water by 50% increase of 9 TL, which is 9 TL plus 4 equals 13 TL. This is the first trick.

The second trick is this; In August, the dollar index increased from 4.60 TL to 7.15, ok, but after two months it fell back to 5.15. So, has the price of carboy water, which increased from 9 lira to 13 lira, decreased? No. As a result, it is a clear fact that the price has risen not because the dollar has risen, but because of the opportunists.

The state noticed the situation and started to strictly control prices in the market, especially for basic foods. An independent market supervision and surveillance agency was established. In fact, the competition conditions are tightened by increasing the number of markets belonging to the Agricultural Credit Cooperatives so that the chain markets do not monopolise market price mechanism by themselves.

To summarize; The point is that the dollar index should be in equilibrium, rather than the dollar's appreciation / loss. Should the Turkish lira be very valuable? No. Should the dollar be very valuable? No, must be on the verdict and should not fluctuate abnormally at any level.

Of course we need dollars. Because it is still the base currency. If you pay attention, we do not say "the dollar is not important to us". We tried to explain that the “economist's” efforts to create a negative perception on the economy by manipulating the exchange rate waves are unscientific.

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