Why is the war raging against the Turkish lira?
More accurately what is going on can be described as a battle against the Turkish lira as part of a war to protect the position of the U.S. dollar.
With a huge proportion of external debt denominated in dollars; some $300 billion in private as opposed to government debt amounting to about 50% of Turkish GDP, Turkey is an easy target. That the U.S. has a political beef with Turkey is merely a bonus.
Remembering that, for the United States, maintaining the position of the dollar as a reserve currency is key to the survival of the country, this war is very important.
What we are seeing at the moment is an inevitable response to the ongoing process of de-dollarisation.
There will be responses and counter-responses but the biggest single risk, in my opinion, is that the actions currently being taken by the United States tend, whether successful or not, to lead to the outcome that is least desired by the U.S.
That’s because sanctions, currency manipulations, and other economic attacks tend to stimulate those under attack to find ways to defend against them. The victims are forced to isolate themselves from the U.S. dollar and that tends to reduce the effectiveness of the dollar as a reserve currency. Thus the strategy must be a relatively short-term one with a view to getting the major stakeholders under attack to capitulate quickly.
The weakness of the U.S. strategy suggests that we will see a rapid increase in the value of the dollar relative to other currencies but then a rapid fall and a rapid increase in the inflation rate in the U.S. some years from now.
Actually, weak/strong currency is a misnomer. More accurately one should think of the price of a currency and its relation to others. You almost get there by understanding that a high priced currency and a low priced currency both have advantages and disadvantages. Just the same as any other market good.
What is happening right now is an on-going effort by the United States to manipulate its currency price higher relative to certain other currencies to attain political outcomes.
There’s advantages and disadvantages to that. However, one can not just set aside debt from that understanding on the basis that it is too complicated to think about. Debt is integral to the price of a currency and integral to what the United States is up to.
What many casual observers do not understand is the effect of debt upon the price of the dollar, relative to other currencies and why debt has enabled the U.S. to act as it does.
You see, the actions now being taken are reducing the ability of the U.S. to sell its debt to other countries and thus export dollars. The FED is now engaged in a process of tightening money supply (and therefore debt) which reduces the ability of the U.S. to export currency without increasing the domestic money supply and thus inflation.
By the way, while it is clear that the U.S. is acting against specific targets, the attack is actually upon all currencies that are not the U.S. dollar due to the interrelated nature of currencies. All currencies will tend to move together in order that arbitrage opportunities are removed. Market pricing tends to work to remove arbitrage opportunities. The U.S. has identified some targets that it thinks are weak enough to be influenced at low cost, Turkey was an obvious choice given the structure of Turkish economy and debt.
Oh, yeah, most folks don’t understand that the money supply is at the core of inflation.
There are some good books about the topic, it is complex, there are many interdependent mechanisms, but that’s why I said that the current campaign of the U.S government against the rest of the world can only be a short-term one and depends upon rapid capitulation of the other economies of the world.
The actions of the U.S. were inevitable (even if not sensible) and come at just about the last possible period of time when such actions have a hope of working.