Summary: Turkish Central Bank Head gets pink slip & Lira collapses<br> Putin challenges Biden to a debate - White House says he's busy<br> Bubbles Everywhere, $1.9 trillion in penny stock transactions last month<br> <br> <br> <br> The McAlvany Weekly Commentary<br> with David McAlvany and Kevin Orrick<br> <br> Necessary Discipline In Central Banking Will Get You Fired<br> March 23, 2021<br> <br> “Gradually what we’re seeing is credibility called into question and central banks will do what they have to do unless they’re muzzled. When the system has been abused, the currency has been abused, budget deficits have been abused, the hard road is regaining credibility. One of the tests that we have over the next 12, 18, 24 months is to see if in fact central banks can remain independent from the political pressure that we’ve brought on them as they are forced to respond to market realities.” — David McAlvany<br> <br> Kevin: Welcome to the McAlvany Weekly Commentary. I’m Kevin Orrick along with David McAlvany. <br> <br> David, I know that Thanksgiving normally is in November, but why don’t we talk Turkey here in March? Because what we’re seeing— and we talk about perception management an awful lot, and the central banks sort of being caught in the corner between controlling inflation and trying to do it without scaring people.<br> <br> David: Erdogan’s been in a tight spot as he’s seen the Turkish lira in decline, and there was a change of power last year. Naci Ağbal was brought in, appointed central bank governor in the fourth quarter. And sure enough, this is a guy who not only talked tough, but actually acted tough too, and—<br> <br> Kevin: A little bit like Volcker did back in the early ’80s, he was raising the stakes.<br> <br> David: Exactly. He was raising rates to tame inflation. And the reality is central bankers who raise rates, they’re not popular. Yes, it buffers inflation. Yes, it stabilizes a currency, but it’s not politically popular. It’s not a fun experience for the public, nor is it fun for the politicians who are beholden to the public. So the more democratic the place is, the harder it is to deal with. So—<br> <br> Kevin: Well, do you remember? We had a guest one time who worked for Reagan in the economic side of things, and they hated Volcker because when Reagan came in Volcker was raising rates and trying to keep the dollar from failing. I would imagine Erdogan has absolutely no patience for something like that.<br> <br> David: And so this weekend he fired the central bank president, and sure enough, the Turkish lira went into free fall. It was precisely what we said on Friday of last week in our Hard Asset Insights. You either have central bank discipline, as we had in Turkey, or you have bond market discipline, what we would refer to as the bond market vigilantes, who are bringing about a discipline of sorts into the bond market, raising rates. And if those disciplines are abandoned or if there’s control introduced into the equation to suppress rates, the foreign exchange markets show it very obviously. And so the Turkish lira literally went to hell over the last three days. Now it’s not the only thing that has suffered because the credit markets in Turkey have also shown that stress. Five-year credit default swaps jumped 155 basis points, the most ever, to 460 basis points total—<br> <br> Kevin: Which is sort of— that’s the cost of insurance of something going wrong, right?<br> <br> David: That’s right. So, first thing this week in our asset management conversation, it’s where do we see stress? Well guess who holds a lot of Turkish paper? European Bank. So European Bank suffered a lot more earlier this week than any other financial institution, and it’s because of their Turkish exposure. Turkey has a lot of dollar-denominated debt. So as the Turkish lira declines, the hurdle to pay back that dollar-denominated debt or euro...
