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Paul Krugman | Troubles in Turkey

Thursday, 13 February 2014 09:47 By Paul Krugman, Krugman & Co. | Op-Ed
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(Image: Oliver; Austria / CartoonArts International / The New York Times Syndicate)(Image: Oliver; Austria / CartoonArts International / The New York Times Syndicate)"There cannot be a crisis next week. My schedule is already full."
- Henry Kissinger

O.K., did we need this? Turkey? Who was paying attention to Turkey? Some people were, of course, because that was their job.

The International Monetary Fund released the results of its latest Article IV consultation - regular reports that are supposed to provide a sort of early warning system - just over a month ago. It mentioned some worries. For example, according to the I.M.F.: "The most concerning aspect is the widening short FX position of the nonfinancial corporates.

This has jumped from US$78 billion in 2008 to US$165 billion now."

But it went on to suggest that the risks weren't large, among other things because "the floating exchange regime reduces the probability of a very large and abrupt adjustment in the exchange rate."

Ahem, see the chart here.

(Image: The New York Times) (Image: The New York Times)

Qualitatively, this looks like a classic emerging-markets crisis: Foreign funds came flooding in, there was a sharp rise in private-sector foreign-currency-denominated debt, and then foreign money turned on its heel and fled.

Quantitatively, it shouldn't be that bad: Turkish external debt is only 40 percent of gross domestic product (or was before the nation's currency, the lira, plunged), and supposedly Turkish businesses aren't all that leveraged. On the other hand, there's a political crisis as well as a currency crisis.

Oh, and contagion among emerging markets. Lovely.

All this is happening with recovery in the West still very weak and growing deflation risk. In a recent column titled "World Risks Deflationary Shock as BRICS Puncture Credit Bubbles, Ambrose Evans-Pritchard, the international business editor at The Telegraph, went more purplish with his prose on this than I'm willing to - these economies are either fairly small (Turkey, South Africa), or not that heavily indebted (India). But this is definitely not what we needed right now. And it's not really an accident either.

If you take secular stagnation seriously, as you should, then we have a chronic problem of too much saving chasing too few good investment opportunities, which means that people only feel prosperous when money thinks it has found more good places to go than it really has - and soon enough figures that out, with nasty effects.

Lots more on this, probably, as I get up to speed on the Bosphorus.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2014 The New York Times.

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