Bitcoin Could Solve Turkey’s Currency Crisis

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It is December 2021, and this is an all-time low compared to as President Recep Erdogan continues to implement what the Wall Street Journal calls “unconventional economic policies.” Turkish households saw the value of the national currency drop nearly 30% last month alone, making everything from food to fuel significantly more expensive for families already in difficulty.

Like many others, I think this might solve the Turkish Lira problem. And to understand why, it might be useful to dust off a book written 45 years ago by Austrian economist Friedrich Hayek.

3 Year TRY / USD Chart

In the book Denationalization of Money, the Nobel Laureate argues that a government’s monology on money is just as undesirable as any other monopoly. He opposes the creation of a shared European currency – something that would become a reality in 1999 with the introduction of – and he proposes that private institutions be allowed to issue their own currencies.

It’s an idea Hayek recognizes as “too unfamiliar and even alarming for most people.” And yet, he says, those same people would eventually learn to see the benefits of a system that allows government-issued fiat currency to “compete for the favor of the public.”

But compete with what? Although written half a century ago, Hayek’s book seems to anticipate the rise of digital assets such as Bitcoin and Ether, which today are what come closest to me, aside from gold and gold. ‘money, denationalized money.

Bitcoin solves this problem

As of this writing, there are over 15,000 different cryptocurrencies available to trade, according to CoinMarketCap. Even Hayek would agree that it’s too much competition. To keep things simple, we’ll stick to talking about Bitcoin.

As a decentralized asset, Bitcoin is precisely the type of asset Hayek may have had in mind. It is not issued by any government and does not belong to any government. No central bank controls it. It is completely independent of borders. I have not been able to send money to someone in Cuba using Western Union (NYSE 🙂 anymore since operations ended there last year. But Bitcoin? No problem.

In addition, Bitcoin has been a fabulous store of value against traditional currencies such as the Turkish lira and even the dollar, whose purchasing power has steadily deteriorated since the creation of the Federal Reserve in 1913. Au in the past 40 years alone, the greenback has lost two-thirds of its value as Fed governors pursued increasingly unorthodox monetary plans.

American dollar century chart

As for the problem of monetary manipulation, Hayek sees competing currencies as the solution. If people had a choice, he believes, it “would prevent governments from ‘protecting’ the currencies they issue against the harmful consequences of their own measures.” In other words, central bankers and finance ministers would have a harder time “hiding” measures to depreciate the value of their currencies.

He should then begin to understand why countries like China and Turkey have effectively banned Bitcoin, and why bureaucrats and policymakers in the US and Europe are eager to regulate it?

Free markets, free currencies

Despite the crypto ban, many Turks have reportedly turned to Bitcoin, not to mention, as the pound continues to fall amid Erdogan’s insistence on lowering interest rates to combat runaway inflation . Yes, central banks usually raise rates to control higher prices, not to lower them, but Erdogan apparently does not want to risk the economic momentum for economic stability. And before I say it, no, heads of government are usually not in charge of monetary policy.

The country’s finance minister, Lutfi Elvan, resigned in protest last week, and Erdogan immediately replaced him with a loyalist. This tells me that the president isn’t going to abandon his easy money program anytime soon, which is bad for consumer prices but good for Bitcoin’s use case.

I believe in free markets, as I guess you are. Competition benefits consumers not only because it gives them choices; it also breeds innovation and helps control prices.

Monopolies usually have the opposite effect, but for some reason we usually don’t think of the lira, dollar, or any other fiat currency as a ‘monopoly’. Maybe it’s time we did.

Disclosure: All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be suitable for all investors.

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