There are certain moments in economic history where lessons from the past should not merely inform us – they should warn us. We are at such a juncture right now.

Under normal circumstances, I would be reluctant to draw parallels between Turkey’s monetary experiments and American monetary policy. However, in light of Trump’s recent verbal attacks on the Federal Reserve and Jerome Powell – declaring on Truth Social that Powell’s “termination cannot come fast enough” and labelling him as “always TOO LATE AND WRONG” – we are witnessing concerning signs of a politicisation of monetary policy typically associated only with emerging markets.

The Turkish Monetary Collapse – A Case Study in Central Bank Independence

Let us examine the data. The graph below tells a frightening story about the consequences of political interference in monetary policy:

You might notice I’m using the Danish krone – that boring, stable, low-inflation currency – as my reference point rather than the increasingly shaky-looking dollar. One must maintain certain standards in monetary analysis, after all!

Perhaps this is my Danish heritage showing through, but when tracking monetary disasters, it helps to use a measuring stick that isn’t itself beginning to resemble a piece of uncooked spaghetti.

From 2000 to approximately 2016, Turkey experienced relatively moderate developments in both inflation and exchange rates. The blue line shows the price level, whilst the red line shows the TRY/DKK rate. Note that when the red curve rises, it means one must pay more Turkish lira for one Danish krone – effectively a weakening of the lira.

The drastic deterioration begins around 2016 (first dotted line), precisely coinciding with Erdogan’s initial interference in central bank independence. The subsequent red dotted lines mark further interventions in the central bank’s independence – particularly the dismissal of governors who attempted to combat inflation with interest rate increases.

The result has been catastrophic: The Turkish lira has collapsed from approximately 1 TRY/DKK to over 5 TRY/DKK. Simultaneously, the Turkish price level has increased eightfold in just eight years.

Market Mechanisms Do Not Respect Nationality

The fundamental mechanism is simple, yet often overlooked by politicians: For monetary policy to work, the central bank must have credibility. Without credibility, even correct monetary policy decisions become ineffective because the market anticipates future politicisation. And the market prices in not only current policy but also expected future interventions.

Particularly alarming is the development after 2020 (fourth dotted line), where the graph shows an almost vertical increase in both inflation and currency depreciation. This illustrates how a breakdown in confidence can become self-reinforcing.

The American Parallel

Trump’s signals are creating precisely this dynamic in the US. He needn’t even sack Powell – the threat alone is sufficient to influence market expectations. The US appears to be moving down the Turkish path – a route characterised by eroding central bank independence, rising inflation expectations, and gradual pressure on the currency.

This is not an exaggeration. The most frightening aspect of the graph is how clearly it demonstrates that economic mechanisms do not respond to nationality or tradition – they respond to incentives and expectations.

America’s economic strength might create a false sense of immunity to such dynamics, but the data from Turkey clearly shows that no economy is immune to the consequences of politicised monetary policy.

Combating inflation requires an independent central bank with the mandate to act, even when unpopular. Undermining this institution invites precisely the problems it was designed to prevent – and the speed at which matters can deteriorate once confidence is broken is evident from the last five years of the graph.

The Practical Implications

It is worth noting that Trump actually faces significant difficulties in firing Jerome Powell, but he doesn’t even need to sack Powell.

He can simply tell the world that he will appoint some reckless candidate who will do as instructed when Powell’s term expires in 2026. And every time this Trump lackey speaks, it will effectively ease US monetary policy.

Powell will be increasingly powerless – gradually losing control over monetary policy despite officially remaining Fed chairman.

Given these developments, I certainly wouldn’t wish to be “long” dollars right now… Perhaps it’s time to reconsider the virtues of the humble Danish krone or Swiss franc.

…..

Links you should have a look at

PAICE – the AI consultancy I have co-founded

“Globale tanker” – if you want to book me for a keynote speech, a lecture or a workshop