The Turkish lira continued to set new records this morning. At one point, you could get more than seven Turkish lira to the US dollar.
Why is the currency still collapsing?
Because, in short, President Erdogan is running around blaming everyone else rather than taking the action needed to restore the confidence of investors.
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And if he or someone else doesn't get a grip, there's still a long way down from here...
Turkey is going down an age-old route that leads to misery
Here's Turkey's basic problem it's an age-old issue. Autocrats buy into the system of markets and free trade and all the rest of it when times are good. Their economies boom. Their people have jobs and some spare cash and even access to credit.
But being human, they overdo it on the credit side of things. And eventually you get to a point where the economy is vulnerable to relatively minor changes in global markets.
Turkey, for example, is too reliant on foreign funds. With the Federal Reserve in the US starting to raise interest rates (for purely domestic reasons, rather than any animus against Turkey), it's harder for overseas markets particularly riskier emerging markets to attract those foreign funds.
Problem is, by the time a turning point comes, those same autocrats have taken all the credit for the golden era. So they don't want things to slow down. Because if they do, they fear that they'll end up with all the blame for the downturn, and the sometimes ugly regime change that goes with that.
So when things inevitably start to slow down, they refuse to face reality. They don't want the central bank to put up interest rates. They start to blame "speculators" backed by US dollars, for conspiring against them. And they just make things worse.
(Just wait until you hear Donald Trump when the US economy inevitably hits a wall. He's already agitating against the Federal Reserve raising interest rates.)
Now, wiser heads may prevail. Erdogan's son-in-law has been making some of the right noises this morning. And traders everywhere are itching to catch the turning point on the currency, because they know any bounce will be impressive.
But by this point, Turkey is already facing a recession, a potential banking crisis, and rampant inflation.
That won't be fun for people living in Turkey, and they have my sympathy. It will make holidays there cheaper for the rest of us, but the fear of unrest is not exactly attractive to tourists.
Why Turkey is not important enough to cause contagion alone
However, the big question that we really want to know the answer to now is: how could this affect wider markets, if at all? Let's look at it and consider potential vectors for "contagion".
First, there's economic. Put bluntly, Turkey is a small and not-particularly-important economy. As Andrew Kenningham of Capital Economics points out, Turkey accounts for about 1% of the global economy, and it doesn't do a huge amount of trade except with small neighbouring countries. So from that perspective, it doesn't matter.
Second, there's the financial markets. The Turkish market itself is again, internationally irrelevant. The UK stock market is 50 times as big as the Turkish one. And only a fifth of the market is owned by non-residents, as Kenningham notes. So again, it's not important.
Third, there's the banking system. As we pointed out on Friday, some eurozone banks have exposure to Turkey. Spain's BBVA has a big stake in Turkey's second-biggest private bank. France and Italy are next, but they don't have much exposure. The UK has very little.
This is a bit of an issue, but it's not catastrophic. We know what will happen ultimately, if a eurozone bank runs into trouble it'll get a backdoor bailout. It's already happened in Italy. So, if anything, the euro has probably been somewhat over-sold on this fear of banking exposure.
Fourth, there's political contagion. This is a little more uncertain. It's clearly not ideal that a country in such a geopolitically sensitive position is facing an economic crisis and no doubt, a political crisis to go alongside it. Yet that's probably not something that will overly concern markets.
Finally, there's sentiment.
I have very little time for arguments based on the idea that investors panic or act for reasons that are little more than "fits of the vapours". If people lack "animal spirits" or are suffering from particular fear of "uncertainty", then there is always a reason you can trace it back to.
However, you can argue that the more complacent investors are, the more likely they are to be jolted out of that complacency by events that perhaps wouldn't worry them at other times.
I think that this is probably the biggest concern about Turkey. The real issue with Turkey goes back to what we said at the start about changing global economic conditions.
We've known for a long time that Erdogan was an autocrat and a dictator-in-waiting. The reason it's coming to a head now is because the global macroeconomic backdrop is becoming less forgiving.
US interest rates are heading higher, and they're not the only ones. The dollar is rising and that basically means that global monetary policy is tightening.
As Warren Buffett once put it (in a different context), it's not until the tide goes out that you see who's been swimming naked. The tide is starting to go out. So all those little flaws and problems that were covered over are now being revealed.
If Turkey is having an apparent impact on the euro and on its fellow emerging markets, then it's down to this. In other words, it's not really about Turkey it's about the stronger dollar.
Whether the US will take steps to try to stop this or not, is another matter.
