The Turkish Lesson
Turkey’s economic collapse didn’t happen by accident—it was the result of deliberate policy choices that ignored economic fundamentals in favor of political doctrine. For years, President Erdoğan pursued a radical economic experiment that became known as “Erdoganomics”. This strategy was built on the belief that high interest rates were inherently harmful and that the solution to inflation was lower, not higher, borrowing costs. The results were catastrophic.
While central banks around the world were raising interest rates to combat rising prices, Erdoğan went in the opposite direction. He pushed Turkey’s central bank to cut rates aggressively, calling high rates “the mother of all evil.” This policy caused inflation in Turkey to skyrocket, peaking at 85% in 2022. As a consequence, the TRY lost its value at a frightening pace, and ordinary Turks saw the value of their savings melt away. As confidence in the currency collapsed, people rushed to convert their money mostly into dollars and gold.
To slow the TRY’s decline, the government used a combination of financial smoke and mirrors. It borrowed heavily from friendly governments like Qatar and the UAE through $70 billion in currency swaps. Domestically, it pressured banks into arranging $55 billion in foreign exchange swaps that masked the country’s deteriorating financial position. But beneath the surface, Turkey’s net reserves (positive balances minus liabilities) actually sank to minus $60 billion as per recent estimates. Yes, my dear reader, Turkey’s monetary reserves are negative.
On top of this, Turkish banks partnered with international financial institutions to promote and distribute complex financial products, like high-yield derivatives linked to the TRY, that attracted foreign investors. These products seemed lucrative, but once the lira began collapsing (an 85% drop since 2020), investors faced massive losses. An estimated $250 billion in losses piled up, hitting institutions and pensioners abroad, particularly in countries like Japan and Germany. This is something I flagged for the first time more than 2 years ago on X (post)
By the time Turkey’s central bank reversed course and jacked up interest rates, that are still 46% today while inflation remains painfully high at ~40% because trust in Turkish institutions and the country had irreparably eroded, it was too late. Economic credibility, once lost, is hard to recover. Turkey’s experience shows that when political agendas override sound economics, the consequences can last for years.
Though Turkey’s economy is smaller and younger than those of Japan or the UK, the underlying patterns of crisis are alarmingly familiar in these two advanced nations. Both are showing signs of the same mistakes: dependence on cheap money, hidden debt burdens, and financial systems stretched to the breaking point.
Japan Debt Trap
Japan has spent decades fighting deflation through aggressive monetary easing. The Bank of Japan’s policy of Yield Curve Control (YCC), which keeps interest rates near zero, was supposed to stabilize the economy. But this strategy has come at a steep cost. Japan’s national debt now sits at a staggering 1.3 quadrillion JPY, or more than 260% of GDP, the highest in the world, even higher than Venezuela!
As U.S. interest rates rose in recent years, Japan’s ultra-loose policy made the JPY increasingly unattractive. The currency has plunged 40% since 2021, making imports more expensive and putting stress on Japan’s financial system especially the JPY carry trade that came close to a full implosion in August last year (A TRAVELER GUIDE TO NAVIGATE THE BANK OF JAPAN MESS). Beneath the surface, banks have used exotic currency derivatives to generate returns—products similar to those that burned investors in Turkey. Estimates suggest these instruments are already hiding hundreds of billions of USD in potential losses, creating a ticking time bomb of mass margin calls and market chaos that can push the JPY to 300 per USD (A PEEK INTO THE FUTURE: USD/JPY ROAD TO 300).
Japan also faces a demographic challenge that compounds the financial risks. With a rapidly aging population, the ratio of retirees to workers is expected to reach 1 to 1.8 by 2040. Pension systems have increasingly relied on risky financial assets to maintain payouts, much like Turkey relied on unsustainable financial inflows to support its currency.
United Kingdom: Financial System on a Knife’s Edge
In Britain, the risks stem from a complex pension system that nearly collapsed once before as I extensively described in my latest weekly podcast “THE MOUNTING CRISIS IN THE UK FINANCIAL SYSTEM WILL MAKE 2022 LOOK LIKE A BRIEF REHEARSAL”. In 2022, a spike in bond yields triggered a crisis in Liability-Driven Investment (LDI) strategies used by pension funds. These highly leveraged positions—some with 7 times leverage—became unstable, forcing the Bank of England (BoE) to step in with emergency support.
Despite that close call, UK pension funds have only shifted their risk rather than reducing it. Instead of government bonds, many now hold illiquid assets like real estate and private equity. These are harder to value and sell in a crisis—much like Turkey’s banks that hid losses using accounting tricks.
The UK’s debt figures are also more alarming than they appear. While the official public debt stands at £2.87 trillion, the real number—including off-the-books obligations like pension guarantees, private finance initiatives, and Bank of England losses—is closer to £6.5 trillion. This mirrors the hidden liabilities that helped sink Turkey’s economy.
Why These Crises May Hit Japan and UK Harder Than Turkey’s
If Turkey’s collapse was the result of short-sighted decision-making, Japan and Britain face even steeper challenges, because the tools that so far saved Turkey’s economy from a total implosion, like fast growth and a young population, aren’t available to them.
Japan’s future hangs on the fate of the JPY. If the currency continues to weaken, the Bank of Japan and the Japanese government may be forced into an impossible choice: continue printing money and risk run-away inflation, or cut spending hard on pensions and social services, leading to deep societal pain. Either outcome would shake the foundations of the Japanese economic model.
For Britain, the danger lies in the interaction between rising mortgage costs, fragile pension funds, and banks exposed to falling asset values. As mortgages reset above 5%, defaults are likely to increase. At the same time, pension funds may face margin calls because of a continued rise in long-term yields and this could set off a financial chain reaction like the one narrowly avoided in 2022, but on a much larger scale.
Conclusion
Turkey’s collapse teaches a simple but painful truth: waiting too long to fix structural problems leads to disaster. For Japan and the UK, the next 18 months are critical, in my opinion. If policymakers act decisively, they may yet avoid the worst. If they delay, the consequences will be harder to contain.
Without painful but badly needed financial and economic reforms, Japan could slide into a demographic and financial wasteland, and Britain risks becoming a modern “Argentina with nukes.” The signs are already here; the question is whether anyone will act in time.
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