The next cycle crisis has begun

By John Mangun, Business Mirror, Aug 15, 2018

Earthquakes can create disasters, which have plagued civilizations from earliest times. The first recorded tremor happened in 1831 BC in China’s Shandong province.

But when it comes to destruction and consequences, nothing beats a volcano. We still study the eruption of Mount Thera in Greece, which erupted around 1610 BC. The energy was equivalent to several atomic bombs going off within a fraction of a second.

The thing about a volcanic eruption is the observance of warning signs over a relatively long period. When it happens, there is not much you can do except run away, but at least you have a life-saving option.

The cycle that gave us the political “chaos” beginning in 2015 was like a series of earthquakes. Not all nations saw their existing political class to be “overthrown” at the ballot box. Many did. Certainly, there were some signs that this could happen but as a citizen in those countries, there was little that could be done after the election.

Both in the Philippines and the United States, loud voices cried that they would leave if Duterte or Trump were elected. But they stayed around, which sort of canceled out their predictions of the end of life if those two men gained leadership.

However, the economic chaos that will continue through its cycle end in 2020 is a different story. This is the volcano, which will create much more damage than any populist president. We can see it coming and how the progression will unfold. We can run away or we can build a “volcano-proof bunker” for shelter. But we must know the warning signs.

We have seen rumblings for several years particularly in Greece, Portugal and Spain. Argentina and Brazil have released some noxious economic gases from time to time. But now, molten lava is flowing down the slopes of “Mount Turkey.”

It is not like Turkey is some minor player. It is a member of the G-20 group of nations and is the 18th-largest economy in the world. The Philippines is No. 39. Its current annual economic growth rate is 7.4 percent. The Turkish government debt to GDP is a low 28 percent. And yet the Turkish lira has lost 45 percent against the US dollar in 2018.

Economies run and are successful or not based on one factor—public confidence. Turkish inflation is currently at 16 percent. The base interest rate is 18 percent, the government must borrow money at 22 percent and food inflation is running 21 percent.

Prices go higher because sellers believe that costs will be higher tomorrow. Interest rates go up because lenders are not confident they will be repaid. Currencies suffer large depreciation because real people are increasingly worried about the future. The government strongly encouraged businesses to borrow to where private debt is 170 percent of GDP, which is too high for the size of the economy.

New US trade sanctions are not helping the situation but the beginning started with the coup attempt in 2016 when the people—even supporters of President Recep Tayyip Erdogan—realized he would do anything to retain power. Since then he has lost all confidence domestically and internationally to remain. Money always talks louder than the politicians. Interest rates more than doubled after Erdogan became president in 2014.

Turkey’s political chaos has now become economic chaos and is a forerunner of what the next 18 months hold. If Turkey defaults on its debt —which with the dying lira is a possibility—major European banks will be significantly damaged and the economic volcanic eruptions will begin to spread more rapidly. The next cycle crisis has already started.