The only chance that Turkey has to stabilize the lira and stop further depreciation is to establish a currency board and anchor the lira to another reserve, like gold, said Steve Hanke, professor of Applied Economics at the Johns Hopkins University and senior fellow at the Cato Institute.
"Under a currency board arrangement that was gold based, the lira would trade at a fixed exchange rate to gold, be freely convertible, and it would be fully backed 100% by gold. So, the lira would literally be as as good as gold," Hanke told Kitco News.
Hanke noted that under this arrangement, inflation in Turkey would "collapse," from 100% on an annual basis down to "almost nothing, overnight," further stabilizing the lira.
He added that this currency board arrangement is Turkey's only option at preventing further lira depreciation at this point, as by definition, capital controls under a currency board with a fixed currency is not possible, and raising interest rates would also not be economically sound policy given the high inflation rate.
"There's no way that the lira will stabilize with the current system that they have. The inflation rate, as I measure it, is around 100% in Turkey right now, on an annual basis, and that implies that to get a real yield that's positive, you'd have to have interest rates over 100% and that of course, that will kill the Turkish economy," he said.
Hanke added that Turkey is no stranger to lira collapses, as their currency has witnessed similar rapid depreciation in the past.
"They're slow learners," he said.
- Watch the full interview on Kitco News