Currently, people here in Turkey are suffering the consequences of poor monetary policy over many years — resulting in an enormous increase of the cost of living.

Even though I am only staying here for a short time, I can feel the inflation. For example, a lot of the menus are filled with stickers on top of the prices, since the prices increase so rapidly that it is hard to keep printing new menus every few days. Further, passing by banks and currency exchange shops I can see every day how the Lira is loosing in value in comparison to the Euro (which itself is loosing considerably in value): When I arrived, I got 15.50 Lira per Euro, now, 12 days later, I am getting 15.90. Hence, I only withdraw a small amount of cash and try to pay by credit card wherever I can. Also, in some coffee shop chains, where I can see the price table above the counter, the actual price I get charged is actually slightly higher, which I guess is due to the fact that their system has already updated to a new price, while the wooden tables haven’t been renewed [I’m pretty sure that they aren’t trying to scam me for a few Kurus (Kurus = cents)].

Economically, the problem of living in such an inflationary environment is, that it makes it much harder to engage in economic calculation, due to uncertainty and a rapidly changing unit of account. Accordingly, making good decisions is a much harder task for any business, causing additional frictions and inefficiencies which otherwise wouldn’t exist.

Most discouragingly, Turkish people who saved up money and kept their savings in Turkish Lira, or Turkish bonds, are the ones who are getting totally screwed throughout this period.

Looking at the above chart, it can be observed that the inflation rate of the Lira was kind of stable until 2018, then had a short hike before starting its path of exponentially increasing in 2020. Note that the broad money supply grew at an average of about 25% between 2000 and 2020, which is the main fundamental input that sets the stage for huge price increases later on. This should serve as a warning also for other nations… trusting in the ability of central banks to manage the inflation rate is quite a risky endeavor… once the wheels start rolling, things can suddenly spiral out of control.

What can we take away:

• People who held Lira or Turkish bonds lost most of their purchasing power by now.
• People, who held their savings in the Turkish stock market also lost money over the last 3 years, but way less.
• People who have kept most savings in real estate, other fiat currencies, or fixed rate securities abroad are about equal.
• People who held it in gold and bitcoin over the time frame did quite well — the ones who held bitcoin actually did extraordinarily well.

For everyone who is interested to read a deeper macroeconomic analysis of the inflation in Turkey, I recommend Lyn Alden’s most recent article, “Investing During Stagflation”, in which she looks at Turkey as a contemporary case study.