222 THE BiG DROP
iticians to cut interest rates and devalue the Turkish currency to
promote exports and tourism.
This is a typical case of a country being pushed to join the
currency wars. Of course, what results from the currency wars
is not growth, but inflation, as recent experience in Brazil and
Australia has demonstrated.
Turkey has a large, well-educated population, good in-
frastructure, strong exports and tourism and is strategically
located to act as a conduit for energy flows from the Caspian
and Central Asian regions to the Balkans and Central Europe.
Based on these accomplishments and resources, Turkey seems
poised for continued growth and should be a magnet for for-
eign direct investment from countries with capital surpluses,
including China and Russia.
The Turkish individual savings rate is low, while consum-
ers continue to spend freely using credit cards and other forms
of consumer credit. The banks are happy to accommodate this
credit expansion, because they are flush with deposits. Turkish
consumers prefer to leave their money in the bank, where de-
posits rates are 8% or higher.
This impedes capital formation because most investment
products such as stocks and bonds cannot compete with the
high rates offered by the banks. The result is that Turkey is un-
derinvesting, and over consuming, fueled by easy credit. The
credit boom has the makings of a future credit collapse similar
to the U.S. subprime fiasco in 2007.
The bubble dynamics are not confined to consumer credit.
Real estate, both high-end residential and commercial, is in a
bubble also, with rapidly rising prices and a skyline filled with
construction cranes. This boom is also being fueled by cheap
bank credit.
Much of the residential demand is coming from wealthy
international buyers, many trying to get money out of unstable
home countries such as China, Russia, Argentina, Venezuela,