Mahfi Eğilmez The era of ‘losing money from money’ has begun in Turkey

Mahfi Eğilmez

Economist Mahfi Eğilmez said that the era of ‘making money from money’ is over in Turkey and the era of ‘losing money from money’ has begun. Eğilmez attributed the problem to high inflation.

Mahfi Eğilmez said that the period of ‘making money from money’ as in the past is over in Turkey’s high inflation vortex, and that the period of ‘losing money from money’ has begun. According to calculations made by Eğilmez, a person who invested his money in bank deposits last year received minus 27 percent interest.

Pointing out that those who took loans from the bank were profitable, Mahfi Eğilmez drew attention to the following details in his blog post:

“Until recently, there was a very common discourse: “Making money from money.” I think politicians started using this discourse first and then it spread to the whole society. What was meant by this discourse was that instead of using one’s money in a production business, one preferred to invest it in deposits and earn interest. In terms of economic science, this was actually a completely empty discourse. Because there is no difference between using money in a production business and depositing it in a bank as a deposit, unless you have hidden it under a pillow in the form of foreign currency, gold, etc.

Bank deposits made a loss

The bank does not eat, tear up or destroy that money. It has to lend it either to someone who wants to produce or to someone who wants to use it for consumption. Otherwise it will make a loss. Those who take the loan for production contribute to the economy by producing. Those who take it for consumption increase demand by spending it, and after a while the increase in demand leads to an increase in supply. In other words, the money deposited in the bank provides interest income to its owner on the one hand, and contributes to the economy by increasing production through the production – consumption – production chain. Earning interest income in this chain depends on a positive real interest rate (i.e. inflation-adjusted interest income).

If the interest rate given by banks on deposits is below the inflation rate, then there is a negative real interest rate and the saver cannot earn a return and even suffers a loss. Although the real interest rate calculation is based on today’s nominal interest rate and future (expected) inflation, let’s look at the structure from one year ago to today using the same formula. Our formula is as follows:

Realized Real Interest Rate in February 2024 = (1 + Nominal Interest Rate in February 2023) / (1 + Inflation in February 2024) – 1

In February 2023, the nominal interest rate given by banks was 20 percent. Since today’s inflation is 65 percent, let’s substitute these values:

Realized Real Interest Rate in February 2024 = {(1 + 0.20) / (1 + 0.65)} – 1 = – 0.27

Citizens failed to protect their money

Accordingly, a person who deposited his money in a bank a year ago received 27 percent negative interest, which means that he could not maintain his purchasing power according to inflation. In other words, he/she has experienced the phenomenon of losing money from money. Let’s put this into numbers. At the beginning of February 2023, let’s imagine a person who deposits 100 TL in the bank for one year at 20 percent interest. At the beginning of February 2024, this person will receive 120 TL from the bank as principal + interest. Since inflation is 65 percent in the same period, the value of the money received by this person can be calculated as follows:

{(1+ 0,20) / (1 + 0,65)} x 100 = 72 TL.

This means that instead of having a purchasing power of 100 TL a year ago, this person today has a purchasing power of only 72 TL (despite receiving interest). In other words, he has lost 28 percent of his purchasing power.

In contrast, the situation of a person who received a loan from the same bank on the same date is different. In February 2023, a person who takes a one-year loan of 100 TL from the bank with a 30 percent interest rate and buys a good worth 100 TL with this money will pay 130 TL to the bank with interest in February 2024. If the price of the good he purchased is 165 TL due to inflation, he will have bought this good for 65 TL instead of 100 TL (130 – 65 =).

This clearly shows that those who deposit money in the bank are the losers and those who borrow from the bank are the winners.

Wealth was transferred from savers to borrowers

The inflation data we use here are from TurkStat. If we replace them with ENAG data, which is much closer to reality, the situation will be much more disastrous.

The transformation of making money out of money into losing money out of money is a phenomenon of the last three years. The rapid rise in inflation and the corresponding suppression of interest rates and the exchange rate have led to the emergence of such a phenomenon.

The result of this practice is the transfer of wealth from savers to debtors.”

You can read the article here


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