What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing about a month ago, we made a video discussing the high inflation and deteriorating economic conditions in turkey. Today we're doing a follow-up video, because the situation in the country has gotten a lot more interesting. If you haven't been following the news about turkey, here's a quick recap! Over the past few years, president erdogan has pressured the central bank to keep interest rates low to boost economic growth. The problems were exacerbated as pandemic-related lockdowns, reduce aggregate supply and increase unemployment.

These two factors led to inflation readings in excess of 20 percent and a rapidly depreciating turkish lira at the recent trough. The lira had depreciated by as much as 80 percent versus the us dollar. Since five years ago, most investors and economists were predicting a complete collapse of the lira, as erdogan still refuses to tighten monetary policy. But inexplicably, in the past five days, delira has actually experienced a massive rally increasing by almost 70 percent.

So what is behind this reversal of fortunes? Does it mean that turkey has finally gotten its house in order and will begin an economic recovery? It's complicated erdogan knew that the country's current trajectory was unsustainable, as inflation was spiraling out of control, but at the same time he didn't want to increase interest rates, which would likely cause a painful recession. So he thought of a new creative solution that could allow him to have his cake and eat it too. On tuesday december 21, the turkish finance ministry unveiled a new savings account scheme that will allow turkish residents to protect their liras from potential future depreciation. If the lira continues to depreciate, the government will reimburse savers for the value that they lost to depreciation.

This is an extremely favorable scheme for turkish savers, as it allows them to benefit from high nominal interest rates, while at the same time bearing zero depreciation risk versus the us dollar. The purpose of the program is to decrease selling pressure on the lira. Turks will no longer be motivated to convert their liras to foreign currencies, while the program has yet to be fully rolled out. Forex speculators are already expecting it to be a success as they bid up the price, almost 70 percent.

If this experiment works, erdogan would go down as an economic genius. If everything goes according to plan, he can save the currency while at the same time avoiding a painful monetary contraction, but this scheme is highly risky and could easily backfire. He is playing a high-stakes gamble with the fate of the lira in the country's economy online. The lira has been free-falling for the better part of last year before the recent rally it had depreciated by more than 50 against the dollar since the beginning of the year.

Ordinary turks have seen their savings and real wages deteriorate significantly. As inflation is running above 20 per year, prices of imported goods have more than doubled, with the currency falling, so fast people naturally start to look to other forms of payment to protect their wealth. People briefly turned to bitcoin as an alternative method of transaction, but the government quickly banned crypto, as it represented a threat to their monetary authority, unable to convert their liras into bitcoin. People instead started converting them into us dollars when a lot of people started selling lyris to buy dollars.

This caused the exchange rate to depreciate. The government could ban foreign currencies, but this would greatly hamper the country's ability to engage in international trade. So that is not a viable option. The only way to save the lira is to find some way to convince people to stop selling their liras in exchange for foreign currencies.

The traditional way to tackle this problem is for the central bank to increase real interest rates. This will make turkish bonds more attractive and increase demand for the lira. The problem is raising interest rates, increases interest, expense for businesses. This typically causes companies to scale down their operations and lay workers off.

This is the last thing the country needs, as their economy is already in a precarious position. President erdogan has made it pretty clear. He is unwilling to raise interest rates as he called them, the mother of all evil, but if you're not willing to raise interest rates, what else is there to do? Erdogan created a new savings program meant to discourage turks from selling their liras. The scheme works as follows: you, deposit 1, 000 liras with the bank.

The deposit rate is about 13. This sounds like a lot, but given how high inflation is, the real rate is negative. After one year, your 1000 lira's will turn to 1130. However, it's possible that the lira will continue to depreciate against the dollar during this time - hypothetically, let's say it depreciates by 50 percent.

In this case, the government will reimburse you the difference. So they'll give you two thousand liras. They give you whichever value is higher in this way. It's basically a free call option on the lyra with zero risk.

You know your wealth will at least not decline in dollar terms, while many analysts have written off this plan as a desperate gimmick by the government. It's actually a pretty genius plan that could work. In 2021, turkey's consumer inflation has increased by about 20 percent. At the same time, the lira depreciated by more than 50.

That means the price of imported goods has more than doubled. If you strip out imports, the inflation of domestically produced goods is actually lower than 20. So, while the inflation picture is bad, it's not quite as bad as you might think. Just by looking at the abysmal performance of the lira, erdogan probably thinks the decline of the lira has gotten ahead of itself and is not justified by real economic conditions on the ground.

Turkey has been stuck in a vicious cycle of currency depreciation. People sell their liros because they fear their price will go down. The selling pressure itself causes the lyra to depreciate, confirming people's fears and triggering even more selling. Thus, they are stuck in a self-fulfilling prophecy, which could potentially cause the currency to fall by more than is economically justified.

This savings scheme could break this cycle by giving the people confidence to hold their wealth in lyra's. This will decrease the selling pressure and finally stabilize the currency. While the plan could work, it is also highly risky. In the optimistic scenario the liro will depreciate by less than 13 over the next year.

If this is the case, savers just get the 13 interest rate from the bank and the government doesn't have to spend anything. However, in the worst case scenario, the lira continues to depreciate rapidly. The government could have to pay savers the difference. The savings team will likely be extremely popular as it's a very good deal for saviors.

There could be tens or even hundreds of millions of dollars deposited if the government has to reimburse a significant portion of this. They probably won't have enough money. They'll have no choice but to borrow money from the central bank which will in turn print the money. Such a situation would fuel even more inflation and more depreciation.

It will also erode what little trust remains with the turkish central bank. As they probably wouldn't be able to orchestrate a similar scheme in the future, while this is definitely a risky bet desperate times call for desperate measures, erdogan is putting all of his chips on the table, but the potential for upside may be well worth the risk. If this plan does work out, it would be a huge win, not just for turkey, but for all emerging market economies. Many developing countries, such as argentina, brazil, south africa and many southeast asian countries face currency crisis from time to time.

Most of the time, these crises are the result of ill-advised economic policy on the part of the government or central bank, but in many cases international speculators cause undue selling pressure which causes the currency to collapse, even when the government could have saved the situation. Otherwise, these currency collapses often end up with the country needing a bailout from the international monetary fund. These imf bailouts almost always come with strings attached. They often force the countries to enact contractionary, fiscal policies which cause painful recessions and high unemployment.

If the turkish experiment works. Other emerging market countries around the world could adopt similar policies as a temporary measure when their currencies are unfairly beaten down. While turkey has serious problems with lack of independence for their central bank, we should hold off on criticizing erdogan's new policy until it fully plays out, because it just might work alright, guys that wraps it up for this video. What do you think about turkey's new savings program will finally save the lira? Let us know in the comment section below, if you enjoyed this content, make sure to hit the like button and subscribe, so you don't miss future uploads as always.

Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.