Foreign exchange flowing towards developing countries leads to further appreciation of domestic currencies.

The US takes actions that give goose bumps to a group of well known economists in the country in order to boost the economy. Since 2008 there appears a significant monetary expansion in the US. On September 3, 2008, the size of the balance sheet of FED was US$907 billion. On November 5, 2008, i.e. in two months, this figure jumped up to US$2.1 trillion. Almost this entire jump resulted from the liquidity injected in the financial system. By the end of 2009, the size of the balance sheet grew slightly by US$100 million. However this time the underlying factor was purchase of Treasury bills by the FED. As of October 27, 2010 size of FED's balance sheet stands at US$2.3 trillion.

In short, there exists a huge rise over the last two years. The substantial part of this took place in the severest period of the crisis. In the following period, the origin of the rise changes, though the outcome does not: size of the balance sheet does not tighten.

Of course you might say "Why should we care about FED's balance sheet on this beautiful Sunday?" But you will certainly not be the only one who complains. US economists who address the issue with their ideological glasses also complain about this. Their motivation is not a concern for us now; what really matters is the deadlock this monetary expansion drags towards the economic administration of a number of countries.

On the one hand, the US should restart consuming. This is essential for the sake of the world economy. In this regard, monetary expansion is deemed necessary by many economists. But one the other hand, low interest rates in the US coupled with the news that monetary expansion will be sustained for some longer and will even intensify lead to the depreciation of US Dollar. This implies that currencies of other countries in exchange for US$ appreciates. This is a critical problem for countries growth rates of which are closely tied to their export volume.

US's policy can give way to an additional problem for countries like Turkey. This abundance of liquidity results in a rise in capital inflows. FX flowing towards developing countries leads to further appreciation of domestic currencies. What is more, since it is known for sure that the abundance of liquidity in the US will eventually we halted, capital inflow to developing countries prevail in the very short term. Soon, liquidity will flow back to safe waters resulting in the depreciation of domestic currencies.

Some countries react against this situation. For instance, Brazil tries to discourage short term capital inflows by imposing several taxes. Turkey yet remains quiet. Last week Ali Babacan, Minister Responsible for the Economy, stated once again that Turkey will not be imposing capital controls. This is OK. However, in that case we have to take into account that the appreciation of the lira does not stem from the improvement in the economic fundamentals. And if it does not stem from fundamentals, we must be afraid of, or take an aversion to it.

This commentary was published in Radikal daily on 31.10.2010