Why Turkey Should Prepare Itself for an Economic Collapse

The Turkish Central Bank is engaging in reckless policy. Those invested in the country should prepare themselves for the consequences. Despite a rising

, the Turkish Central Bank is maintaining a policy of keeping interest rates low. The bank may be hoping to prevent the country's currency—the lira—from appreciating. If the lira remains comparatively cheap, Turkish exports should benefit on the global market. As goods from Turkey are priced in the lira, a depreciated lira may make the goods more attractive to foreign consumers. That may keep Turkish goods in demand, and workers in Turkey employed. However, the policy may backfire. As

reports, a Bank of America Merrill Lynch economist anticipates inflation to rise to 7.5% by the end of the year. An economy can tolerate a higher rate of inflation for some time, but not for the longer-term. As last month's riots in South China showed, inflation may lead to severe civil unrest—especially in developing economies like Turkey. At some point, policy makers in Turkey may have to reverse course and tighten to prevent inflation from spiraling out of control. When that happens, investors might anticipate a severe recession, as credit markets in Turkey dry up. Additionally, through its efforts of keeping the lira below true market value, Turkey is artificially stimulating its export industries. When the Bank of Turkey is forced to reverse policy to salvage the lira, those industries will suffer, as they were disproportionately strengthened by the bank's current policies. In the long-term, demographics favor Turkey's continued economic rise. Yet, the country may soon enter a rough patch due to the mistakes of its policy makers.

Though Turkey remains an intriguing growth story, the country's economy remains somewhat difficult to invest in. One way to play the country may be the iShares MSCI Turkey Index Fund

. TUR is an ETF that attempts to return a value corresponding to the general strength of the Turkish economy. Investors may wish to go long or short the ETF depending on their beliefs in regards to Turkey.