Overbuilding, Over-Borrowing, and the Autocracy

By Harry Dent

Read a great article in The New York Times on Sunday (August 19).

Erdoğan of Turkey made it into the West’s graces by pretending to bring democracy to Turkey. He was to be an example of a moderate, modernizing Muslim leader.

For 60 years Turkey has been a stalwart NATO ally, bridging together Europe and the volatile Middle East.

Its demographic and urbanization trends have been strong.

I thought that the eurozone made a mistake by not allowing Turkey into that economic alliance years ago.

Now it looks as though that was the better decision, as Erdoğan has clearly reversed his position and attitude dramatically, taking on a more autocratic rule and allying more with Gulf, African nations, and Russia.

You could argue that bringing Turkey into the eurozone might have prevented this direction change. And the U.S. could have been more supportive after its attempted coup.

But a dictator is a dictator, and Erdoğan fits the bill.

Erdoğan served as prime minister from 2003 through 2014 before becoming president. Despite some democratic reforms, he always claimed: “For us, democracy is a means to an end.”

Meaning great trade and financing…

Following the super-low interest rate environment of 2008 due to QE in developed countries, Turkey and other emerging countries were able to borrow aggressively and catch up to our debt bubble.

It’s been the unintentional impact of our desperate stimulus efforts…

Most of $60 trillion increase in global debt since the 2008 crisis came from the emerging world; the greater part of that from China.

But much of the non-China debt was borrowed largely in U.S. dollars at very low interest rates.

Erdoğan greatly expanded Turkey’s urbanization and public projects. He even encouraged crony corporate borrowing with implicit guarantees as his government got more and more autocratic…

Sounds a lot like another nation, doesn’t it? (Yup. China!)

As of now, Erdoğan’s government is one of the most oppressive in an autocratic region.

European banks – including Greece – are owed much of the Turkish debt.

Favorable relations with the U.S. have broken down since Trump began slapping tariffs on steel and aluminum from Turkey, hurting an already collapsing economy and currency.

And if you didn’t know it, David Stockman will be talking about where the U.S. stands during this politically and economically turbulent time at this years’

As the Fed continues to spur on rising U.S. short- and long-term rates – along with a rising dollar – it’s now harder to pay back any U.S.-denominated debt…

Turkey (on a smaller scale) and China (on the larger scale) are the symptoms of the emerging world crisis, which is very likely the trigger for this bubble’s crash.

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It’s similar to how subprime loans were for the last bubble.

The biggest difference between Turkey and China is the sheer scale.

The fact that Turkey doesn’t have the same urbanization potential ahead as China does doesn’t do them any favors either.

China is at 59% urbanization after accelerating rapidly from 19% since 1980.

Turkey is already at 75% urban from 44% in 1980.

Such rates slow dramatically after 80%. It has added 31% of its population to cities since 1980 versus 40% for China, which is a bit slower as well.

But Turkey financed its growth largely on foreign debt, especially in the last decade.

It now has the highest percent of foreign debt to GDP out of any emerging country at 53.4% (China only comes in at 14.3%).

Though China has at least twice as much total debt as a percentage of GDP, it’s internally funded through government guarantees and its own banking system.

Yet it’s still the same strategy.

A country stimulates through excess borrowing and government guarantees to create outsized growth. Then, when the chickens start coming home to roost after such a leveraged and artificial strategy, they get more autocratic to deal with the social unrest and economic collapse.

Given that China has more control over its economy and less reliance on foreign credit, it’ll likely take more meltdowns in emerging countries like Turkey, Venezuela, and South Africa to highlight for the world the greater vulnerability of China.

China may have the most leveraged urbanization machine in the world, but its workforce demographics have already peaked. And its urban migration is slowing – reversing, even – due to the consequences of super-high real estate prices, pollution, and traffic from its steroid-like policies.

Emerging markets are on steroids with massive overexpansion.

Meanwhile, developed countries are on crack with massive money creation and ultra-low interest rates that create asset inflation and bubbles that will burst dramatically.

Turkey is the first significant sign of many to come for triggering debt problems and crashes in the coming crisis. As I said numerous times, it’s just like the subprime crisis that started to emerge in 2006 and 2007, but was not initially seen as a big problem…

This is a big problem!

Excessive debt and slowing demographics are a problem globally – now more so than in 2007.

And China should be the greatest loser before the next debt deleveraging is over.

I see that happening between 2019 and 2023, during the last phase of this predictable Winter Season of deflation.

It’s just a question of whether it starts sooner rather than later…

It’s something that I’ll be focusing on at our Irrational Economic Summit this year, which is happening October 25 through the 27 in Austin, Texas.

Follow me on Twitter @harrydentjr


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