The Dark Side of U.S. Monetary Policy: Impact on Foreign Nations and Turkey's Troubles

Introduction

The United States' monetary policy plays a crucial role in shaping its domestic economy. However, the impact of these policy decisions extends far beyond American borders. Each time the Federal Reserve adjusts its interest rates, the consequences ripple through economies worldwide. While the primary focus is usually on how these changes affect American businesses and consumers, the effects on other countries, especially those in more fragile economic positions like Turkey, are significant. In this article, we explore how U.S. monetary policy decisions negatively impact foreign nations and delve into some of the self-inflicted wounds contributing to Turkey's economic struggles, including hyperinflation and a slowing economy.

The Impact of U.S. Monetary Policy on Foreign Nations

The U.S. dollar holds a unique position as the world's reserve currency, making it a central component of global trade and finance. The majority of international transactions are conducted in U.S. dollars, and many countries hold significant reserves of the currency with their central banks. Consequently, any changes in U.S. monetary policy have widespread ramifications across the globe, irrespective of whether the trade involves the United States directly.

Moreover, the U.S. is the largest economy worldwide, engaging in trade with numerous countries, including Turkey. A simple shift in U.S. demand for Turkish goods can significantly affect Turkey's financial position. For example, a decline in U.S. demand for Turkish goods may reduce Turkey's capital inflow and negatively impact its foreign exchange reserves. When this trade deficit is taken to extremes, as seen in countries like Pakistan, it can lead to a complete depletion of foreign exchange reserves, which severely impacts the local economy.

The Three Main Impacts of U.S. Monetary Policy on Foreign Nations

Capital Flow Impact: When the Federal Reserve raises interest rates in the U.S., it tightens financial conditions, reducing consumer spending and business investments. As a result, the U.S. imports fewer goods from other countries, leading to a reduction in capital flowing into nations like Turkey.

Cost of Debt Impact: Countries often borrow money in U.S. dollars or from foreign lenders, and rising U.S. interest rates increase the cost of servicing external debts. For countries with substantial debt burdens, this can be particularly crippling.

Currency Exchange Impact: Changes in U.S. interest rates impact the relative strength of the U.S. dollar compared to other currencies. A stronger U.S. dollar can hurt countries like Turkey, as it increases the cost of importing goods while decreasing the revenue from exports.

Turkey's Economic Troubles: Poor Decisions and Self-Inflicted Wounds

Turkey has been grappling with an economic crisis since 2018, largely due to its current account deficit, which records all money inflows and outflows from the country. This deficit can lower foreign exchange reserves, leading to more borrowing or currency depreciation. President Erdogan's lack of basic economic education has exacerbated Turkey's troubles, with his misguided belief that high interest rates cause inflation.

Erdogan's reluctance to raise interest rates has hindered outside investments in Turkey and led local businesses to seek better returns elsewhere. This has worsened inflation and caused the Turkish lira to lose significant value against the U.S. dollar. Inflation has surged to alarming levels, making it vital for Turkey to raise interest rates to control its economic instability.

A Glimpse of Hope for Turkey

Recently, the Central Bank of Turkey raised interest rates from 8.5% to 15%, signaling a possible turning point in the country's economic approach. The move was aimed at establishing a disinflation course, anchoring inflation expectations, and controlling pricing behavior. However, for lasting improvement, Turkey must allow its central bank to operate independently from the government's interference.

Conclusion

The impact of U.S. monetary policy decisions extends far beyond American borders and can have severe consequences for economies worldwide, particularly those already in fragile positions. Turkey, facing hyperinflation and a slowing economy, has been grappling with economic woes since 2018. While the Federal Reserve's decisions play a part, Turkey's troubles are also rooted in its own poor financial decisions and reluctance to implement necessary policy changes. As the world continues to grapple with complex economic challenges, it is essential for governments and central banks to strike a balance between their domestic objectives and the interconnected global economy.