Quantitative easing and low interest rates have become fundamental practices of the Federal Reserve, yet for the common American these practices are destroying their capital. However, most Americans save very little due the Federal Reserves policies of low interest rates that promote consumption. Furthermore, economics is a subject very few Americans understand, leaving us with an uninformed populace, who do not question the actions of the Federal Reserve.
Americans are left with an unchecked central bank, answering only to the government, even though it is supposed to be a private entity. Though what happens when there is an informed populace making decisions for themselves against the beliefs of their central bank?
In 2004, Turkey overhauled their entire currency by knocking six zeros off the lira due to hyperinflation with rates reaching a high of 70% in 2001. Since then inflation has tamed and economic prospects have improved. Turkish account deficits were once ranked the second worst behind the United States, now moved down six spots. The Turkish banker, Erdem Basci, was named 2012 Central Banker of the Year not because of designing ingenious monetary policy, it was due to him listening to his people, understanding their habits and implementing regulations that allow banks more freedom. After, having their currency revamped the Turks lost faith in the lira and decided to start preserving their wealth through the purchase of physical gold.
Gold based deposits have increased to three times the amount of traditional savings last July. Now, instead of regulating the ownership of gold, the Turkish central banker required commercial banks to hold a portion of their required reserves in gold; at first the level was set at 10% but was then raised to 30%. These policies have allowed banks to hold 2,200 tons of gold worth $119 billion. These actions along with other have been noticed, as Market Watch featured Turkey in their 2012 report as being a part of the New Tigers.
Even with this new found financial stability, Turks are reluctant to trust their currency. In a recent discussion I had with a local, he noted that Turks living outside of major cities do not put their money into a savings account, instead they purchase and hold onto physical gold. Furthermore, when they need to borrow money they do not seek a loan from a bank but utilize their social network to borrow the amount requested in gold. Part of this borrowing scheme does stem from the Islamic faith in which the Quran forbids charging interest. Besides this fact, Turks understand that both parties make out in this deal, the borrower is able to use the money requested and the lender will not lose any purchasing power as the loan is repaid in the weighted amount borrowed.
Although Turkey is far from competing with the United State on any level they are demonstrating the discipline needed for growth. A certain percentage of Americans have taken to purchasing gold and silver as an alternative savings plan. However, the United States government does not seem to support these principles and the Federal Reserve is certainly not entertaining the idea of allowing commercial banks to hold a certain percentage of their reserves in gold. Hypothetically, if the Federal Reserve were to align policies that support sound monetary policies such as those supported by gold would this have any real effect on the current state of our economy?